Borrower must rent 100% of the building to the Operating Business. Payments to the Borrower are limited to its operating expenses and cannot include a profit to its owners. The Operating Business must use a minimum percentage of the new and used buildings and can rent out a limited amount to unrelated person or business. The requirements are:

1. Existing building – must use 51% for its own use.
2. Construct new building – must use 60% immediately and 80% within 3 to 10 years.
3. Expand existing building – use #1 for existing square footage & #2 above for expanded square footage.
4. Expand building already owned – must meet #2 above for expanded square footage.

*The proceeds from the 504 project cannot improve a building for the rental space to an unrelated third party.
**Building square footage can include exterior space used by the borrower or its affiliate in its operation (i.e. gas pumps, restaurant patio, etc.)

1. Each 504 loan must be guaranteed by at least one individual or entity.
2. Real estate and operating companies must sign or guarantee note.
3. All 20% or more owners of the real estate & operating companies.
4. Husband and wife when combined ownership is 20% AND each owns a minimum of 5%.
5. Trustee of trusts owning 20% or more must guarantee 100%.
*Changing ownership within the last six months does not eliminate the guarantee unless individual sells all ownership and is no longer involved in the business.

Business’ down payment is a minimum of 10%, plus 5% for “Special Use” buildings, plus 5% for “Start-Up/Unproven Management” projects. A “Start-up” business constructing a “Special Use” building would be required to inject 20% of the project costs. If an applicant or its affiliates has an outstanding SBA 504 loan that is special use, additional SBA 504 loans require a minimum of 20% down payment. Down payment must be cash and/or the equity in real estate being improved or refinanced by the 504 loan proceeds.

Yes, the down payment can be borrowed but certain restrictions apply. When the businesses’ injection is borrowed and the collateral is 504 project’s furniture, fixtures, & equipment, then the note must have a 10 year term with no accelerated payments. If the collateral is 504 project real estate, then the note needs to be for a term of 20 years with no accelerated payments. If the business utilizes other business assets to borrow the down payment, then the business must show the ability to service the note. Finally, if from personal sources, then the individual needs to show ability to service the note personally.

Bank and 504 loans cannot exceed 90% of collateral value which includes furniture, fixtures, & equipment’s (new – cost; used – 3rd party valuation) plus real estate’s appraised value. No appraisal is required for projects less than $500,000 unless associated with a business acquisition.

After SBA approval, the third party lender closes on their permanent and interim loans. When the project is completed, the 504 loan will be closed. The loans are then packaged and sold on the open market and a rate is determined about 45 days after close.

504 loans have terms of 10, 20, or 25 years with a decreasing penalty for the first 5 years on a 10 year term, and 10 years on 20 and 25 year terms. The penalty starts at approximately one year’s interest in year 1 and decreases by 20% each year for the 10 year loan, and decreases by 10% each year for the 20 and 25 year loans. The penalty is eliminated in year 6 for the 10 year term, and year 11 for the 20 and 25 year terms.