SBA 504 Loan Structure

Businesses can begin applying for the loans February 28, 2011. The program expires September 27, 2012.

The SBA's conduit for these government-guaranteed 504 loans are Certified Development Companies ("CDCs"), who will refinance a mortgage on a commercial property for 10 to 20 years based on the five and ten year U.S. Treasury notes. In addition to the interest charged by the lender, however, the borrower will also have to pay a fee of 1.043% annually.

CDC lenders that are refinancing mortgages for existing customers will be able to process a loan for up to 70% of the current appraised property value of the commercial real estate, and the SBA will help finance the remaining 20% -- the owner must hold 10% in equity (which may come from the property itself, cash, or equity in another property). For CDC lenders taking on a new refinancing customer, the SBA will finance up to 40% of the loan.

To apply for the refi, the business will be required to obtain a new, independent appraisal for the owner occurpied commercial property for which the refinance is sought.

SBA 504 Loan Eligibility

To qualify, the business must: (1) have a net worth less than $8,500,000; (2) have a net profit-after-tax under $3,000,000 per year; (3) prove that it was current on all loan payments for the prior 12 months; (4) have a commercial real estate loan that is facing either loan maturity, or a balloon payment within the next 24 months; and (5) occupy the premises on which it is seeking the commercial refinance.

Under the program, eligible borrowers who are current on their loan(s) will be able to refinance up to 90% of the current appraised property value of the commercial property, or 100% of the outstanding principal, whichever is lower.

If the property is worth less than what's owed on their mortgages, or underwater, the owner will be required to pay 10% of the loan amount in cash, or collateralize the 10% with equity from another property (e.g. family home).

SBA 504 Loan Benefits

One of the major benefits of this new SBA 504 loan is that the business will only need 10% in equity to qualify for the government guaranteed refinance. Borrowers can refinance up to 90% of the current appraised property value, or 100% of the outstanding mortgage, whichever is lower. However, these loans cannot be used for business expenses, nor can these loans be used to refinance an existing 504 project, or government-guaranteed loan.

Small business owners who wish to take advantage of this program should contact a Certified Development Company in their area for details. To locate a CDC in your area, visit The National Association of Development Companies' (NADCO) website at www.nadco.org.