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SBA 504 Update | February 2015
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SBA 504 Update | Feb 2015

About SBA 504 Loans

> Up to 90% loan-to-cost financing for owner-occupied commercial real estate
> Office, industrial, medical, flex, daycare, retail, self-storage, and flagged hotel
> Total project costs up to $15 million
> Less impact on cash flow means greater flexibility for property owners

SBA 504 loans have a three-part structure, which is ultimately beneficial for both our small business clients and for third-party lenders we work with. A typical project has a 50-40-10 structure, and we’re dealing with the total project cost which includes the purchase price of land and/or existing building(s), construction costs, soft costs, closing costs, and equipment. This means our clients’ out-of-pocket costs are kept to a bare minimum.

Typical SBA 504 Loan Structure

Typical SBA 504 Loan Structure

The 50% 1st mortgage is an ordinary commercial loan provided by a third-party lender. This is at market rates and can have up to a 30-year amortization. Current rates for this piece will likely be in the 5.25%–6.25% range.

The 40% 2nd mortgage is a below-market, fixed-rate bond with an SBA guarantee. This piece is fixed for 20 years and has a 20-year amortization. The current rate is 4.54% (as of 2/13/15).

SBA 504 loans require as little as 10% of the total project cost as down payment from small business borrowers. This, as you may know, is two to three times less than ordinary commercial loans require. Equity in land (if it’s already been purchased) and soft costs (like architectural and engineering fees) can count toward the equity requirement.

If you take the interest rates from the 1st and 2nd mortgages and blend them, you get an effective rate that’s hard to beat with conventional commercial real estate financing. Right now, you could safely assume a blended rate somewhere around 5.16%. For a sample project of $2 million, you’d have a starting down payment of $200,000 and an approximate monthly payment of $11,310.

Some things to keep in mind:

> Ideal property types include office, industrial, medical, flex, standalone retail, flagged hotel, and standalone daycare.

> Additional equity is required for certain projects involving companies that have been in business less than two years and/or properties that fall into the “special-use” category. Thus, the 50-40-10 structure is typical but not guaranteed.

> All rates and figures quoted above are deemed current at the time of publication and are for illustrative purposes only. Every small business commercial real estate project is different, and there are many variables that must be evaluated on a case by case basis to determine appropriate rates and terms.

For customized loan scenarios and payment calculations, download our SmartChoice Commercial Loan Calculator for your iPhone or Android device today. It costs zero dollars and just might prove superhelpful. Or at least sortahelpful. And if you’d rather run a scenario by a real live person instead your iMachine, call us at 866-622-4504 or email us at 504experts@mercantilecc.com right now. Or whenever you want. We’re here to help. Except on Monday. It’s President’s Day and we’ll be closed. But Tuesday. We’ll be here on Tuesday. See you then.

– Your 504 Experts

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2 Comments

  1. kalpesh patel says:

    Hello Sir/Madam
    My name is Kalpesh Patel . we are developing a green hotel Brand ”Evolve ”Hotel. this is going to be new construction . so my question is are there any incentive on place for Green Hotel . and what is down payment on 504 loan Required. Thanks

    • Justin Fricke says:

      Hey Kalpesh,

      Great question.

      As far as financing goes for a start-up hotel, you’re going to be looking at a 20% down payment.

      A few of the incentives for green projects are that the maximum amount allowed to be borrowed on the SBA piece of the loan goes from $5 million to $5.5 million on a single transaction. Typically no one can have more than $5 million in SBA debt at one time, but with a green project, that doesn’t apply, making it easier for small business owners to purchase multiple properties using the SBA 504 Loan.

      Best,
      Justin Fricke

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