The 4-1-1 On The 504
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The 4-1-1 on the 504
Recent changes make the U.S. Small Business Administration"s loan program more relevant
Christopher Hurn, president and CEO, Mercantile Commercial Capital LLC
As published in Scotsman Guide's Commercial Edition, November 2008.
During the first half of this year, there was an interesting and noteworthy exception to the general decline in real estate lending — the U.S. Small Business Administration (SBA) 504-loan program.
Although most SBA loans are down significantly as a reflection of the overall lending environment, the 504-loan program, which enables businesses to buy or enhance their own commercial real estate, has actually posted some surprising results. The program's activity has decreased by just 3 percent from 2007 in SBA Region No. 4, which includes Florida and other southeastern states; it has increased by 1 percent in Region No. 1, which includes New York and New Jersey.
The SBA and lawmakers have noticed the 504-loan program's performance, and several new measures will help to make the loans available to thousands of businesses that would not have qualified for it in the past.
As commercial real estate opportunities become available, mortgage brokers can help their small-business-owner clients reap the benefits of owning versus leasing their space with the help of the 504 loan program.
Higher ceilings
Recently, the SBA raised the ceilings on the net worth and earnings of businesses that can qualify for 504 loans. Companies with a net worth of as much as $8.5 million and as much as $3 million in annual earnings may now obtain a 504 loan, compared to the prior limits of $7.5 million in net worth and $2.5 million in annual earnings.
With this change, the SBA has demonstrated that it recognizes the need to expand this loan program to more businesses. Every year, millions of available 504-loan-program funds go unused. For fiscal 2007, for instance, the program had $1.2 billion left in its budget for loans — funds that went unused by borrowers. Unlike the SBA's 7(a) program, the 504 program has never approached, let alone exceeded, its funding limit.
The new eligibility standards for businesses will enable more companies to use the loan program to grow their operations and create jobs.
Proposed changes
The other — and potentially more significant — change has been proposed as part of the Small Business Lending Stimulus Act of 2008, which as of press time is being considered by the Senate Committee on Small Business and Entrepreneurship. Provisions within this proposed legislation would reduce fees for SBA loans and open the 504-loan program for borrowers to refinance higher-interest conventional loans.
By opening the 504-loan program to refinances, thousands of small-business owners across the country could gain access to loans that are substantially better than even the most-competitive conventional loans for commercial real estate. By significantly lowering their monthly commercial mortgage payment by refinancing with a 504 loan, business-owners can use the funds to add employees and resources to grow their businesses.
Advantages
Mortgage brokers can help small-business owners purchase — rather than lease — their space with the 504-loan program. The savings in interest payments, as well as in the 504 loan's substantially lower equity requirements, are significant. The greater long-term benefits, however, stem from owning commercial property that can continue to generate income even after a business-owner retires.
Business-owners can reduce their initial capital outlay by leveraging the 90-percent loan-to-cost financing that 504 loans offer. The lower downpayment makes it easier for business-owners to afford the initial capital outlay for an acquisition or construction project. In addition, the 504 enables borrowers to include renovations, closing costs and other soft costs along with furniture, fixtures and equipment in the financing package.
The 504 loan covers 90 percent of the total project cost, as opposed to the 70 percent to 80 percent of the property's purchase price or appraised value (whichever is less) offered with conventional commercial loans. The typical breakdown of the funds in a 504 loan is: 50 percent from a bank or other private lender, 40 percent from the SBA and 10 percent from the borrower.
The portion of the 504 loan funded by the SBA represents some of the least-expensive financing available for small businesses. The blended rates for the entire loan often are significantly lower than those of conventional loans and can be fixed for the duration of 20- to 25-year amortizations. In addition, borrowing from the SBA through the 504 program does not preclude business-owners from also applying for funding from the SBA 7(a) program for working capital, inventory and other needs.
Requirements
The SBA 504 loan is available to almost any type of for-profit small and midsized business in the United States, with the exception of financial-services providers, passive real estate investors, companies having a tangible business net worth greater than $8.5 million, or companies with net profits after taxes that averaged more than $3 million during the past two years.
The 504 loan requires applicants to demonstrate job creation, export potential, or other economic-development or public-policy goals, and the vast majority of applicants can meet these goals.
The funds must be used for capital expenses, including land, buildings, construction and equipment. Owner-occupancy requirements are 51 percent of the total square footage for acquisition loans and 60 percent for new construction financing. In addition, multiple businesses can jointly pool 504 financing if they meet occupancy requirements together.
The current lending climate makes the 504-loan program more essential and more beneficial for small businesses than it has been in the past 20 years. Recent changes — as well as proposed changes — make the program more accessible, affordable and relevant to today's small-business owners.
