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Frequently Asked Questions

What is a (section) 504 loan?

The U.S. Small Business Administration enables growing businesses to secure long-term, fixed-rate financing for major fixed assets through its Certified Development Company Program. Commonly referred to as the 504 Program, it is designed to promote local economic development by helping healthy, growing businesses finance the acquisition of long-term fixed assets, such as land, buildings, machinery and equipment, or the building, modernizing, renovating or restoring of facilities. These assets must be used principally to enable the business to create or retain jobs.

In a typical 504 loan package, at least 10% of the project's financing comes from the borrower, 50% from a private-sector lender, and the remaining share from the sale of debentures guaranteed by the SBA. These debentures are sold in the capital bond markets to raise the funds for the SBA portion of the project.

The 504 loan program provides permanent take-out financing for long-term assets. Bridge financing is usually required between the start of the project—which may include the purchase of land for later development—and receipt of funding from debentures and the first mortgage (the SBA will not actually fund a debenture until the project is completed).

More about SBA 504 and other government financing programs

Why 504?

Growing businesses have big plans, big ideas, and big needs. When a conventional loan is not possible, a 504 loan may be the answer. The SBA 504 loan program gives small business owners access to the same low-cost, fixed-rate, long-term financing that large businesses have through the bond markets.

What are the advantages for the business borrower?

Found that perfect building but your banker says you need 30% down? Can't afford 30%? Plus pay for renovations and soft costs and still have enough working capital left over for the expansion? Well, a certified development company can help by making you a loan through SBA 504 loan program. You put only 10% down on the entire project. All project costs are included: land, building, renovation costs and soft costs. The loans are long term and provide a low fixed interest rate. The SBA 504 program can even finance the machinery you need to buy. Interested?

  • You need 10% down in most cases
  • Lets you keep more of the cash for working capital during your expansion
  • low fixed interest rate — second mortgage loan
  • long term financing
  • finance your soft costs including architect fees, title, insurance, etc.
  • access to financing even during a "credit crunch" situation

What are the advantages of SBA 504 over conventional financing?

  • Low down payment. Between 10-20%. Lets you preserve your cash for your working capital. Most banks will lend only 60-70% of the appraised value of the project leaving you to sink in 30-40% plus the costs of renovations plus the soft costs.
  • Fixed rate on the SBA 504 portion. You do not have to worry about the prime lending rate going up to 21%. You can plan because you know the amount of your mortgage payments of the next 20 years!
  • Long term. The 504 loan is for 10 or 20 years. Because Mid State is the second lien position, the bank or other lender doing the 50% first lien loan are willing to lend at a longer term. The longer terms make your monthly payments lower.
  • Low interest rate. Even with all the fees and closing costs included in the rate, it is still a low rate for a subordinate mortgage loan, particularly for small business. The blended rate as between the bank portion and the Certified Lender's 504 portion makes the project affordable to you.

What kind of businesses are eligible?

  • organized as a for-profit business. The only not-for-profit companies eligible for SBA 504 are sheltered workshops.
  • legal entity: corporation, partnership, sole proprietor, limited liability company, or trust ownership
  • virtually any type of legitimate business: manufacturing, wholesale, service, professional service, retail etc.
  • located in or planning to locate in any are of the United States.
  • Be a small business: net worth under $15 million & net profit after taxes under $5 million or meet SBA's other size standards (by sales or number of employees, depending on SIC/NAICS code.)
  • Planning to use the loan proceeds for capital investment (land, building, boat, leasehold improvements, renovation, construction, machinery, & associated soft costs). The SBA 504 loan program is not a working capital program. (See Use of Proceeds section)
  • Another lender must be willing to participate in the financing. The SBA 504 loan finances up to 40% of the total project cost and the other lender finances 50%. the business or its owners puts in 10%.
  • Achieve economic development goals through the project being financed (See Economic Development Requirements section).
  • Owner-user of the project being financed (51% occupancy if existing building, 67% occupancy if new construction). Two or more unrelated small businesses may receive a 504 loan to buy or construct a building as long as they, together, will occupy at least 51% of an existing building or 60% of a new construction.

What kind of businesses are not eligible?

  • not-for-profit (except sheltered workshops)
  • company whose stock in trade is money (stock brokerage house, bank, insurance company [agency eligible])
  • offshore facility
  • speculative operation
  • lobbyists
  • business with more than 1/3 of income derived from legal gambling

What are permitted uses of the proceeds?

  • acquisition of vacant land
  • acquisition of land and building
  • leasehold improvements
  • renovation of building; addition to building
  • construction of a building
  • acquisition of a commercial fishing vessel or party boat
  • acquisition of heavy duty machinery & equipment (such as printing press)
  • associated soft costs; title searches and insurance; attorney fees; appraisals; environmental reports; architects; permits; surveys; installation of machinery; points on bridge loans; small amount of furniture and fixtures, etc.
  • not permitted: mortgage broker fees; points on permanent financing; moving expenses

What are the economic development requirements?

SBA 504 is a community lending program designed to improve the locality. Eligibility requires either:

Job creation or retention (one job per every $65,000 borrowed from CDC under SBA 504) OR:

One of the following public policy goals:

  • helping to revitalize a blighted community with a written revitalization plan
  • expansion of exports
  • minority business development (owned 51% or more by minority business person)
  • change necessitated by federal budget cutbacks
  • change required by mandated standards like health, safety, environment
  • increasing productivity or competitiveness (retooling, robotics, modernization)

One of the following community development goals:

  • Improving, diversifying or stabilizing the local economy
  • Stimulating other business development in the community
  • Bringing new income into the community
  • Assisting manufacturing firms
  • Assisting businesses in a labor surplus area (such as Kern County)

SBA 504 is not a real estate investment tool. It exists to help the community by helping small business have an impact on the community—by creating jobs or in other ways benefiting the community.

What is the structure of the financing?

You determine the total project cost (hard and soft costs). A bank or other financial institution finances 50% of the cost and takes a first mortgage (lien) position on the assets financed. Mid State, through the SBA 504 program, finances 40% of the project cost up to a cap and takes a second mortgage position. You put in just 10% equity (other costs not included).

Typical Project

Acquisition of building $800,000
Renovations $100,000
Machinery $50,000
Soft Costs $50,000
Total $100,000,000
Bank - first mortgage $500,000 permanent loan
SBA 504 - second mortgage $400,000 permanent loan
Equity $100,000
Total $1,000,000

What are the loan amount limits?

CDC can lend you up to 40% of the project cost with a dollar cap of $5,000,000. A CDC-financed project can be any size, but the SBA-backed portion of the the loan package normally is limited to 40% of a project or $5,000,000, whichever is less. The minimum debenture is $50,000.

While there are no limits to project size, typical projects range in size from $200,000 to $10 million. The SBA requires that, for every $65,000 of debenture financing in the CDC's portfolio, an average of one job must be created or retained or meet other economic development objectives. At Mid State Development, our clients have created more than the required number of jobs.

Private Lender 504 Financing Equity
50% of project cost 40% of project cost 10% of project cost
Security 1st lien Security 2nd lien  
$ amount no limit

$ amount $50,000 - $5,000,000

-up to $5,500,000 on manufacture projects and energy saving projects.

Interest rate variable or fixed Interest rate fixed  
Real estate terms 10+ years Real estate terms 10 or 20 years  
Equipment terms 7 years Equipment terms 10 years  


What are the rates and terms?

The rate on the SBA 504 loan portion is set when Mid State sells the bond to fund your loan. The rate is then fixed for the loan term. 504 bonds are amortized securities. Interest rates are based on the current market rate for 5 and 10-year US Treasury issues, plus an amount slightly above the Treasury rate. The SBA 504 rate for November 2013 was 5.46% for 20-year loans; 4.40% for 10-year loans. The effective rate (APR) will include program fees and a loan loss subsidy.

Loans are for 10 or 20 years and are self-liquidating. In order for Mid State to do a 20-year loan, the lender doing the 50% permanent first mortgage must have at least a 10-year term. That lender can have a longer payout. Typically, lenders will lend with a 15-20 year term and 20-year payout. For Mid State to do a 10-year loan, the 50% lender must have a term of at least 7 years. Many lenders will match a CDC's 10-year term.

Are there any provisions regarding ownership?

  • Owners must be US citizens or registered aliens with a green card.
  • Owners cannot be convicted felons currently on probation.
  • Anyone who owns 20% or more of the operating company must personally guarantee (unsecured general guarantee).
  • Liquid assets of the principals are taken into account in determining eligibility.

How is collateral assigned?

  • CDC takes a subordinate (second mortgage) to secure its 40% portion of the financing
  • CDC takes a security interest in assets financed.
  • Key-an life insurance is generally not required unless there is no succession of management
  • Personal guarantees of any owner of 20% or more are required.
  • Other assets of the business or principals are generally not required (unless the company is a startup or the credit is unusually risky or the asset being financed is considered a single purpose asset or does not appraise high enough).

What are the various fees added to the 504 loan amount?

All of the fees on the SBA 504 loan are added to the loan amount so that you can amortize their cost over the loan term. You will sign a note for the 40% of project cost plus the fees. Ongoing fees decrease every 5 years.

Fees are based on the 40% of project cost:

  • 1.5% of the 40% goes to CDC as its processing fee
  • 0.5% of the 40% is a reserve deposit
  • 1/4 of 1% of the 40% is a funding fee
  • loan loss coverage fee
  • various closing costs will be included
  • an amount for Mid State's title insurance and recording fees

In addition, when the loan closes, your monthly payment will include servicing fees* based on the the declining balance of the SBA 504 loan.

  • 0.600% to SBA
  • 3/4% (0.75%) to CDC **
  • 1/10% (0.10%) to the central servicing agent (Well Fargo Bank)

*fee percentages only applicable to loans approved from October 1, 2012 to September 30, 2013

**Mid State's monthly servicing fee is between 5/8% (0.625%) - 2% of the unpaid debenture balance to the CDC.

How are payments made on the SBA 504 loan?

Payments on the SBA 504 loan are made by Automatic Clearing House (ACH) debit to the borrowers designated checking account on the first of each month after the loan closes. They are made in monthly installment. Payments on the 504 loan are separate from your payments on the 50% first mortgage loan. Ongoing fees decrease every 5 years.

There is a prepayment penalty for the first half of the loan term on the SBA 504 loan. In startup situations or single-purpose buildings being financed, an equity injection of 15% is required. The Certified Lender (CDC) is a permanent lender only. This means the 50% first mortgage lender will have to bridge the Certified Lender's 504 loan portion until the project is complete. The Certified Lender will sell its bond and fund its loan when the Certificate of Occupancy is issued. Interest and fees on the bridge loan can be included in the project costs to be financed and the Certified Lender can make the bridge loan exempt from NYS mortgage tax.

What is the application process?

  • Call Mid State and talk to a loan officer to discuss your project.
  • Talk to your bank of account to see if the bank wants to participate by doing the permanent first mortgage and bridge loan.
  • Meet with the Mid State loan officer and structure the deal
  • Submit the Mid State application (basically the same materials submitted to the bank)
  • Mid State's staff will investigate and evaluate you and your company
  • CDC will draw credit reports; perform supplier, bank and trade checks; visit your existing and proposed operations/facilities; assess your credit ability and character
  • Once your bank or other 50% first lien lender has indicated an interest in financing the 50%, the Mid State staff prepares a loan memorandum and presents it to Mid State's loan committee.
  • Once the Mid State load committee approves the project, Mid State presents the application to SBA to acquire its agreement to guarantee Mid State's bond. This generally takes a few days.
  • Mid State then issues a commitment with Authorization and your bank closes its first mortgage loan and bridge loan.
  • Your take the bank's funds to complete the project.
  • When the project is complete, you close with Mid State
  • Mid State wires its money to the bridge lender.
  • The loan is now in paid back in monthly installments through the central servicing agent (Wells Fargo Bank) and Mid State services the loan for its life.

What is the 504 Certified Development Company and what is its role?

Certified development companies are the keys to the 504 loan. CDCs are regional economic development nonprofit organizations sponsored by private interests or by state and local governments. They are licensed by the US Small Business Administration (SBA). CDCs make loans primarily under the SBA 504 program to assist small business. Locally organized CDCs are set up to promote economic development in their communities. There are almost 300 CDCs nationwide.

CDCs operate under the jurisdiction of a board that includes local government officials, private-sector lending institutions, and business and community organizations. A CDC acquires funding for each loan through a bond sale on the open market. The CDC then processes, approves, closes and services the loans. In all ways, the CDC is the direct lender for SBA 504 loans.

What are the bottom-line benefits for commercial lenders?

  • lending at a lower loan-to-value ratio
  • reduce risk by financing a smaller portion of the project while maintaining a first-lien position on 100 % of the assets being financed
  • retain commercial-account relationships while participating in long-term financing
  • make bigger loans; total financing can be $10 million or more
  • develop a secondary market in their first-mortgage portion
  • comply with the Community Reinvestment Act and extend legal lending limits; bankers wishing to participate as the 50% lender get CRA credits
  • customer satisfaction and service
  • generate new business for years to come
  • broaden the community's tax base
  • stimulate the local economy through job creation and retention
  • save time—there is no SBA paperwork for the lender


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