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504 Loan Blog

September Commercial Finance Update: Construction Edition
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SBA 504 construction loans

Construction projects accounted for 62% of our lending activity last year. It wasn’t always that way, but the past few years have been construction-heavy for us. We’ve become pretty darn good at this type of lending (if we do say so ourselves) and that’s good news for you. When you or your clients get stymied by lenders who aren’t keen on financing construction/renovation projects, we’re only a phone call or email away. 

Featured Project:

– North Magnolia Properties, LLC
– Orlando, Florida
– $3.9 million total project cost (acquisition/construction)
– Two office buildings totaling 30,000 sf
– 31 jobs created/retained

North Magnolia Properties

North Magnolia Properties, LLC is an eligible passive concern (EPC) that was formed by McDermit Davis & Company, LLC and Ledford Financial, Inc. The two companies have been growing rapidly and each needed more room to house their expanding business operations. The new facility provides sufficient space to support their future growth plans, and also allows for potential rental income from third-party tenants. During the inspection process, asbestos was found in the buildings and our clients opted for a full renovation. With all the construction projects we’ve worked on all over the country, it was nice to manage a project so close to our headquarters (just over a mile away). If you or your clients have questions or concerns about our construction financing and management superpowers, just let us know.

Tip of the Month:
Buy/Build more than you need

One of the eligibility requirements for our SBA 504 loan program is that the property being financed must be owner-occupied. That means the property owner must occupy at least 51% of the building (60% for construction projects). It also means that smart business owners can buy or build more space than they need and rent out the extra space. This creates a passive income stream for the business and allows for future expansion when needed. There’s also the option of creating a separate business entity (an EPC) to own the property for tax and estate planning, and our featured project this month is a brilliant example of this strategy. If you have questions about how this works, we’ll be glad to help out. Call or email anytime.

About Our 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

Structure & Rate: 

SBA 504 Loan Structure

Our 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 (purchase price of land and/or existing building, construction costs, soft costs, closing costs, and equipment).

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 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. Current rate is 4.68%  (as of September 2014).

Small business owners are required to put down as little as 10% of the total project cost, which 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. The interest rates from the 1st and 2nd mortgages blend to an effective rate that’s hard to beat with ordinary commercial real estate financing. For a total project cost of $10 million, the blended rate would be 5.22% and the approximate monthly payment would be $56,850 (all rates and figures are current estimates at time of issue).

For customized loan scenarios and payment calculations, download our SmartChoice Commercial Loan Calculator for your iPhone or Android device today.

Note: 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.

Contact Us:

Even though it seems we have construction projects coming out our ears, we do plenty of acquisition and equipment loans as well. In fact, we recently closed a loan for a recycling facility that was more equipment than construction (due to the specialized and high-cost nature of the business). You’ll be able to read more about that project in an upcoming update. In the meantime, let us know if you have any questions about SBA 504 loans or commercial real estate financing in general. We’re here to help.

Call 1-866-622-4504 | Email
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– Your 504 Experts



  1. RONALD TWITTY says:

    I am looking to purchase land and to build on this property.This will be 100% owner occupy.This is corner property at 7300 square feet.Vacant land cost is $570,000.
    I have 20% to put down($114,000)I need $456,000 to make this purchase.Once this loan is repaid,I will be looking
    for construction loan,Then a mortgage for new building.Thank you in advance.

    • Trey says:

      Hey, Ronald! We’ll be in touch shortly. Thanks for reaching out!

      • Jerry Chautin says:

        Greetings Ronald.

        If your venture creates enough jobs, SBA’s 504 program could be the ideal “takeout” loan for the land and construction phases of your venture. Mercantile can provide the takeout and may be willing to fund the interim financing portion as well through its bank. Alternatively, another lender would provide the interim financing against Mercantile’s 504 takeout.

        Keep in mind, however, SBA 504 does not provide working capital. And since the 504 lender has a lien on your collateral (real estate, furnishings, fixtures and equipment), the lender would also be a good candidate to provide you with working capital — either conventionally or SBA 7(a).

        Kindly check out my Herald-Tribune column on the subject.

        Wishing you the best of success,

        Jerry Chautin
        Former entrepreneur, commercial mortgage banker & business lender (including SBA)
        Currently, commercial real estate & business columnist & content blogger & Volunteer SCORE business mentor
        SBA’s 2006 national “Journalist of the Year” winner

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