SBA 504 Loans for Commercial Real Estate and Major Equipment
Building ownership may be within your reach thanks to UCEDC and the SBA 504 Loan Program
The SBA 504 Loan Program is designed to help growing businesses to expand and create new jobs by providing long-term financing for the purchase or upgrade of commercial real estate and/or the purchase of major equipment and machinery.
With low down payments (as little as 10%), financing of fees and closing costs, and no balloon payments, the 504 program is an attractive option for New Jersey business owners who want to conserve their working capital.
How does it work?
The 504 program combines the resources of a commercial lender (usually a bank), UCEDC, and the borrower to finance the purchase, construction or improvement of owner-occupied property or the purchase of major equipment through long-term financing.
The borrower must contribute a minimum of 10% of the project cost – a significant break on what would normally be required in a conventional commercial real estate loan. That contribution increases to 15% if the business has been in operation less than two years or if the property is considered special purpose (e.g. car wash, bowling alley, hotel, etc). If the business is both new and special purpose, the contribution increases to 20%.
The bank finances 50% of the project, secured by a first lien on the project property. UCEDC finances up to 40% of the project, holding a second lien on the property. Two distinct loans are issued, each with their own terms and interest.
Who can apply?
Most private, for-profit small businesses will be eligible to apply. Under the 504 Program, a business qualifies if it has a tangible net worth not more than $15 million, and an average net income of $5 million or less after federal income taxes for the preceding two years prior to application. Non-profit entities, religious institutions, real estate investors, and financial institutions do not qualify.
How can the loan be used?
Funds are used to finance owned, long-term fixed assets. Additionally, soft costs associated with obtaining the loan can be financed as part of the total project cost. Eligible uses include:
- purchase of existing buildings;
- purchase of land and land improvements, including grading, street improvements, utilities, parking lots and landscaping;
- construction of new facilities or modernizing, renovating or converting existing facilities;
- purchase of long-term machinery (minimum of 10-year life; e.g. printing press, manufacturing equipment);
- refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment
Note: Owner must occupy at least 51% of existing buildings. For new construction, owner must agree to occupy 60% of the building with plans to occupy 80% within 10 years.
How much can I borrow?
UCEDC’s portion of the financing represents a maximum of 40% of the total, up to $5 million. In a typical 90% financing scenario, the maximum total project cost would be $12.5 million, with the bank financing 50% or $6.25 million and UCEDC financing 40% or $5 million, for a total of $11.25 million.
What will this cost me?
The SBA 504 program has two distinct financing sources – a commercial bank and the SBA/UCEDC. The loan that you secure with the bank has its own rates and fees set by the bank, although typically the rate is fixed with a reset every five years.
The portion of the loan financed by UCEDC through the SBA includes one-time program fees and fees that are built into the interest rate. The one-time program fees plus closing costs are rolled into the loan. The following information pertains only to the loan amount financed by UCEDC/SBA.
Interest rates: The SBA finances the 504 program by selling debentures, or bonds, to investors. That sale occurs once a month on the New York market and a fixed interest rate is set at that time. That means you will not know your final interest rate until the debenture that includes your loan is sold. Interest rates are expressed as effective rates, which include all fees.
Term: 25 years for real estate; 10 years for projects that involve equipment purchase only. No prepayment penalty after Year 10.
Collateral: No additional collateral beyond the project being financed. Personal guarantees are required from all principals.
One-Time Fees: Approximately 2.75 – 3.0% of the loan amount. These fees are associated with originating and closing/funding the loan and are rolled into the total loan amount. Closing costs, attorney’s fees, and other related expenses can also be financed as part of the loan.
Packaging Fee: $2,500 payable upon submission of a loan application. Returned if application is denied or refunded when approved application debenture is funded. The fee will be forfeited if borrower withdraws application.
What paperwork will I have to submit?
UCEDC and the SBA are looking for evidence that your business is well-run, that you have the ability to pay back the loan, and that the loan proceeds will be used constructively to grow your business.
In addition to the SBA loan application form, you will be asked to complete other SBA forms, provide copies of various records, and submit supporting materials. The following is a list of documents that typically accompany a completed SBA application package:
- Personal background and financial statements
- Business Financial Statements, including Profit & Loss and Financial Projections
- Ownerships and Affiliations
- Business Certificate/License
- Loan application history
- Income tax returns
- Resumes of principals
- Business overview and history, including why loan is needed and how it will help the business
- Project Cost Documentation, including purchase agreement, settlement sheet, contractors bid on construction and list of equipment to be purchased and cost.
The SBA offers a wealth of information on how to prepare a sound loan application, including preparation of financial statements, business case statements, etc. Here’s a good place to get started.
What’s the next step?
Talk to one of our loan officers to learn more about the 504 program and the application process. Call Ellen McHenry (firstname.lastname@example.org ), Paula Star (email@example.com ), or Andrew Gaffney (firstname.lastname@example.org) directly at 908-527-1166.