SBA 504 LOAN

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The SBA 504 loan program is a government-sponsored commercial real estate loan program that helps small businesses acquire the commercial real estate that their companies need to grow.  Many banks today are terrified of making conventional commercial real estate loans.  They are afraid of losing money.  Using the SBA 504 loan program, however, a bank is largely insulated from loan losses.  As a result, many banks are still quite anxious to make these commercial loans.  

Under the SBA 504 loan program, a borrower can finance up to 90% of the purchase of a piece of commercial real estate.  He can sometimes also finance up to 90% of associated heavy equipment he might need for his factory. 

These loans are typically made by  banks, with the assistance of a local Community Development Corporation.  A conventional commercial first mortgage of 50% loan-to-value is made by the bank, and a piggy-back second mortgage up to 90% loan-to-value is recorded concurrently. 

For example, let's suppose a widget manufacturer wished to expand its business by buying an industrial building for $1 million.  The bank would make a $500,000 conventional commercial first mortgage at market rates, typically amortized over 25 years, due in ten to twenty-five years, and with a fixed rate for at least the first five years.  The bank would record concurrently a $400,000 second mortgage that would eventually be sold to a local Certified Development Corporation and guaranteed by the SBA. 

The buyer would therefore get $900,000 in financing on this building.  He would only have to put $100,000 down.  In contrast, if he applied to a conventional commercial mortgage lender, he normally would only be able to finance $700,000 to $750,000.  He would have to put down a whopping $250,000 to $300,000.

But wait!  It's gets better.  The second mortgage is fully-amortized over 20 years.  There is no balloon payment.  In addition, because the second mortgage loan is guaranteed by the SBA, the interest rate is typically 1.5% lower than the underlying conventional first mortgage.  The borrower gets a blended rate, between the market interest rate on the $500,000 first mortgage and the lower, subsidized interest rate on the $400,000 second mortgage, that is around 1% lower than conventional first mortgage rates. 

But that's not all!  Both loans are also assumable.  The loan fees are also low - typically 1.5 points on the first mortgage and 1 point on the second mortgage.  The SBA 504 loan program is a great deal.  Plus banks actually want to make these loans.

There are some limitations.  First of all, the property must be at least 51% owner-used.  Usually the borrower's credit  score must be at least 600 - but even this is good compared to banks today, who normally require a credit score of at least 650 on conventional commercial real estate loans.

Finally, after adding back depreciation and existing rent payments, the borrower's net income from his business, according to his tax returns, must substantiate enough income to make the proposed new mortgage payment.  The coverage ratio only needs to be 1.0.  In contrast, conventional commercial real estate lenders require a 1.25 debt service coverage ratio.

You can apply to scores of SBA lenders using C-Loans.com.  And C-Loans is free! 

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