For restaurant owners and small business that own commercial real estate, one of the best kept secrets is the SBA 504 Loan Program.
Must business know of the SBA 7A Program, which can be utilized for all small business purposes and has an interest rate that is tied to the Prime Rate on a floating basis, adjustable monthly as the Prime Rate rises or falls. For start-ups and borrowings that are in small amounts, this program is extremely popular, and during the latest downturn, a loan that banks were still making. Why? Because the bank received a Government Guarantee of the loan ranging from 75%-90%, therefore if a loan defaulted, the bank would receive that percentage of the loan amount paid by the Federal Government.
What is not widely known is the SBA 504 Program. This program has the same maximum loan amount of $5,000,000 as the 7A Program, but its limitation is that it can only be utilized for acquisition or renovation purposes. Like the 7A Program, it offers the borrower the benefit of only requiring a 10% equity injection, but unlike the 7A Program, it offers a fixed rate on the loan.
As an example, if you were purchasing a restaurant with land & building for a price of $2,000,000 the loan would be structured as follows:
Bank Conventional 1st Mortgage (50%)- $1,000,000
CDC or SBA 2nd Mortgage (40%)- 800,000
Borrower’s Equity (10%)- 200,000
Total Transaction- $2,000,000
Terms of the Bank 1st Mortgage is usually made based on 20-25 year payout, with a maturity of 10 years. Interest Rates are fixed at the current market rates, for a period of 5 years, and then reset for the remaining 5 years, until balloon maturity.
Terms of the CDC or SBA 2nd Mortgage are a straight 20 years maturity/payout. Interest Rates are fixed for the 20 years at current market rates.
Currently the rate for the Bank Loan is ranging between 5.50%-6.50% and for the CDC/SBA 2nd Mortgage between 5.0%-6.0%. The advantage to the borrower is locking in favorable financing, with minimum equity contribution, at today’s low interest rates. Additionally, the CDC/SBA Mortgage is fixed for 20 years, with no reset ever.
REMEMBER THIS DATE, 9/27/12
On February 17, 2011 the SBA launched a temporary program. It would allow the SBA 504 Program to be utilized also to refinance existing loans. The Federal Government realized that a number of small business had existing commercial mortgages on their property that was made when real estate values were higher, and when these loans mature, the banks that hold the loan would probably not refinance the remaining loan based on the current appraised value of the real estate. This program allows existing borrowers to refinance their existing loan through the 504 program, which was previously limited for acquisition/renovation purposes only.
Unfortunately, this program will end on September 27, 2012, and most likely, will not be extended. What this means is that you must have an application accepted by that date———- the loan can close after the 9/27/12 deadline.
The borrower still must meet all the payment ability standards set by the SBA, but they can refinance if the Loan to Value of the underlining collateral has deteriorated.
If you think you situation warrants consideration of this program, It’s Now or Never!