Real estate financing for business owners

The Small Business Administration 504 loans are designed to provide financing for the purchase of fixed assets which often includes real estate.  This program generally distributes the loan among three parties in which the business owner provides a down payment of at least ten percent, a conventional lender contributes fifty percent and a certified development company funds the remaining forty percent. Certified Development Companies are non-profit organizations that facilitate the SBA 504 Loan Program, and are certified and regulated by the SBA. Certified Development Companies can help business owners throughout the entire loan process, and ensure that the process is streamlined, efficient, and painless for the business owner.

How are the 504 Loans Structured?

The SBA provides the 40% second mortgage of the total projects costs, a participating lender provides a 50% first mortgage of the project costs, and the business owner provides 10% of the project costs. For example, on a $10 Million purchase, the SBA provides $4 Million, the participating lender provides $5 Million, and the business owner injects $1 Million.

SBA 504 Loans

Why should lenders participate in the 504 Loan Program?

Lenders have first lien position, which minimizes their collateral and credit risk. Lenders can entertain large projects, assist more customers by leveraging lending capacity, and gain new banking relationships.

Why should commercial real estate brokers and developers know about the 504 Loan Program?

An objective of the program is to help business owners make the change from renting to owning their own buildings. Conventional loan products can require up to 50% equity, which can discourage a business owner from purchasing a commercial property. Business owners often rely on their brokers to identify viable financing options.

Other than real estate purchases, how can 504 funds be used?

504 funds can be used for the purchase of improvements, ground up construction or modernization of existing facilities, the purchase of long-term machinery, or the refinancing of existing conventional debt on a business’s existing property.

What collateral is needed to secure the loan?

Most for profit small to medium sized businesses are eligible, as long as the business occupies 51% or more of the property.

What do you need to obtain a pre-qualification?

The minimal information needed to obtain a pre-qualification are the last 2 years of personal and business tax returns, a year-to-date financial statement dated with the last 90 days, and a personal financial statement.

What is the first step in obtaining a SBA 504 pre-qualification?

Contact a local Certified Development Company, your real estate broker, your banking relationship manager, or the SBA department at your business bank.

What other benefits are there in obtaining an SBA 504 loan?

  • Long-Term, Below-Market Fixed Rates; no balloon payments: rates are at historic lows.
  • Longer Loan Amortizations: amortizations range from 20-30 years.
  • Less impact on the business cash flow: retain liquidity for working capital needs.
  • Stabilization of long term occupancy costs.
  • Ability to finance eligible closing and soft costs: retain more liquidity for working capital needs.
  • SBA fees are financed: retain more liquidity for working capital needs.
  • Quick close: 30-40 day closings.

The decision to purchase commercial property is one of the biggest decisions a business owner will make. The purchase of a property gives the business owner the flexibility to maximize tax benefits, a vehicle for retirement, and a secure home for their business.

If you would like to learn more about SBA 504 Loans, please contact Urban Realty today.