SBA Loans Enhance Profit and Value

Certified Development Companies, or CDCs, expand borrower access to the agency’s 504 loans

sba loans enhance value and profit

As published in the Scotsman Guide.

Small businesses are the backbone of the nation’s economy as the biggest job creators and major drivers of thriving communities. The U.S. Small Business Administration (SBA) developed the CDC/504 loan program to provide small- and medium-sized businesses with access to capital to invest in their facilities and expand their reach, giving them a bigger stake in their communities.

The CDC/504 loan features a low down payment and a below-market, long-term fixed interest rate. This affordable financing option makes building ownership possible for individuals who lack the capital to qualify for a conventional loan. Consequently, a larger pool of potential buyers means commercial mortgage brokers reap the benefits as well.

There are three participants in the CDC/504 loan program — the borrower, who supplies the down payment; the lending institution, which supplies the first mortgage; and the Certified Development Company, or CDC, that supplies the second mortgage.

The borrower must contribute a minimum down payment of 10 percent of the total project cost. The first-mortgage lender contributes up to 50 percent, and although the loan terms must conform to SBA criteria, those terms also may include many of the lender’s own requirements. The SBA/CDC contribute up to 40 percent of the remaining costs.

This 10-50-40 breakdown is the most common lending scenario, provided the SBA/CDC portion does not exceed $5 million, or $5.5 million for a manufacturing project or a project with energy-efficiency upgrades. Many other scenarios do exist, however. For example, startups and special purpose properties, such as a hospitality project, require a 15 percent down payment from the borrower. Funds from a CDC/504 loan can be used for the acquisition of real estate, land or equipment, and they cover construction and renovation costs. You also can use a CDC/504 loan to refinance conventional loans. Consult with a CDC to determine the loan breakdown applicable to your client.

Product features

There are several advantages to the CDC/504 loan program to keep in mind when discussing funding proposals with your clients. Following are some highlights of the program:

  • Low down payments. When a broker introduces a potential client to the concept of 90 percent financing, the client’s fantasy of owning a property can be transformed into reality. Conventional commercial mortgage loans often require down payments ranging from 20 percent to 40 percent, an unattainable figure for many individuals. With the CDC/504 loan’s low injection, businesses retain precious working capital for operational costs.
    Renovations and soft costs — such as insurance, attorney fees, appraisals and environmental reports — can also be financed, allowing further cash savings. The 10 percent down payment is one of the biggest attractions of the CDC/504 program.
  • Low fixed-interest rates. Another characteristic of the CDC/504 loan that makes purchasing a property a feasible option for a small-business owner is the below-market, fixed-interest rate. Conventional loans typically come with variable and unpredictable interest rates, which can leave a borrower with a higher monthly payment than expected.
    The interest rate on the SBA portion of the loan guarantees fixed, low monthly payments for the entire 10- or 20-year term, with no final balloon payment. The rate is unaffected by market instability or inflation expectations, which could cause a spike in monthly payments and leave a borrower with a mortgage they cannot afford. As of this past July, the interest rates are 4.76 percent on a 20-year loan and 4.48 percent on a 10-year loan.
  • Stability and equity. Rising rents and shrinking inventory are challenges that many business owners face. To combat rising rents, brokerages are partnering with CDCs to help business owners secure a permanent operating location, which can be crucial to the survival of a business. Looking out for the well-being of a client’s business can be very rewarding for a broker.
    Utilizing the CDC/504 loan program to purchase real estate can provide stability and accumulated equity for a business owner. If your client is writing out a monthly check to a landlord, why not encourage them to put it toward their future? Owning a building is a fantastic way to provide a nest egg for retirement when the time is right.
  • Leasing unused space. By purchasing a building, the owner locks in occupancy expenses and avoids rising lease rates. An additional benefit to ownership is the opportunity to profit on unused space in the building, which can help cover mortgage payments.To qualify for a CDC/504 loan, a business owner must occupy, or plan to occupy, at least 51 percent of an existing building, or 60 percent of a newly constructed building. After helping a client make a purchase, a broker can provide additional support by helping to find tenants to share the building.

CDC support

A CDC is a nonprofit corporation built to support economic development within its community through the SBA’s CDC/504 loan program. CDCs are regulated by the SBA and strive to be the mortgage broker’s partner during the entire loan process, as well as the borrower’s advocate throughout the life of the loan.

CDCs help brokers market a property to find the most-qualified buyer. A customized CDC/504 loan scenario provided by your chosen CDC can show potential clients which properties are affordable. In addition, CDCs can provide a prequalification analysis to buyers, so when the time is right, they are prepared to make an offer. The prequalification letter can be completed within 24 hours and can give potential buyers a leg up over other offers.

CDCs complete all necessary paperwork and guide the buyer through the entire SBA loan process. It is important to choose a CDC with experience and expertise because commercial real estate loans can be tricky. The right CDC will simplify the entire process from approval to closing, ensuring all deadlines are met and making everything seamless for brokers and borrowers.

Certain businesses, such as startups or those within specialized industries, may have difficulty securing a conventional loan on their own. With a CDC/504 loan, the partnership with a CDC lowers a bank’s risk and increases a business owner’s chances of securing capital. CDCs have longstanding relationships with all types of lenders and can help find the best bank to accommodate the first mortgage.

Are your clients eligible? The truth is that most for-profit companies are eligible for the CDC/504 loan program. The biggest stipulation is that the borrower must occupy at least 51 percent of the building. This requirement was implemented to ensure the integrity of the program — to help small businesses, not large investment companies. There are 270 CDCs nationwide. Research the best CDCs in your community and contact them to see if you are eligible for the CDC/504 loan program.

Barbara Morrison

Barbara Morrison

Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison