remaining 10 percent is the borrowers’ equity, and since the
total project cost includes traditionally-out-of-pocket expenses,
it’s a true 10 percent (special-purpose properties and startups
will require slightly more equity). This lower equity requirement allows your small business clients to keep more of their
hard-earned capital to deploy elsewhere in their business while
still getting all the wealth-creating benefits of commercial
Third, the terms of these loans are more advantageous for
small business owners. The first mortgage typically has fully-amortizing, 25-year terms at market rates. The second mortgage
has a 20-year, fully-amortized term with a below-market, fixed
interest rate. The rate on the second mortgage is what makes
this the most inexpensive financing available to small business
owners. For most of 2011, the rate on this portion has hovered
between 4. 5 percent and 5. 5 percent and it’s fixed for 20 years.
That’s cheap money, and it’s hard to find a better deal than that
anywhere in the commercial mortgage industry.
dollars in total project costs, so don’t get stuck thinking these
loans are only for mom-and-pop operations.
As for ineligible borrowers, the following is an exhaustive list:
× Businesses selling products/services through a pyramid
× Businesses that have previously defaulted on a Federal
The 504 loan is for commercial property owner/users. Borrowers
must occupy a simple majority (at least 51 percent) of the property within the following year to qualify. This is not an investment loan product per se, but there’s a bit of flexibility here.
Since the occupancy requirement is only 51 percent, a business owner could purchase more real estate than needed and rent
out up to 49 percent to offset the mortgage expense. Two operating companies can also come together to form a real estate holding company to take title to the property. In other words, a 504
loan doesn’t have to be just one small-business owner purchasing
a commercial property. It could be a physician and an attorney
each using part of an office building, or an office/warehouse facility divided between a staffing company and a distributor. In each
case, an eligible passive corporation (EPC, often known as a real
estate holding company) is created with shared ownership.
Contrary to popular belief, the eligibility requirements for
SBA 504 loans aren’t very restrictive. The following list outlines
how to determine if a business owner qualifies. To be eligible, a
bered) of each principal/guarantor not exceed the total
Under the above guidelines, over 98 percent of incorporated
entities in the United States are qualified small businesses and
eligible for an SBA 504 loan. In fact, many “small” businesses
that get 504 loans would be better described as “mid-sized.” Only
the absolute largest companies get tripped up on these criteria.
Anecdotally, my firm has closed 504 loans north of $11 million
If your client’s business doesn’t fit any of the above categories,
then you probably have a 504-eligible project on yours hands.
But maybe you still have some reservations about the 504 being
an SBA loan product. Let’s look at some common misconcep-
tions about SBA loans.
Common Myths Debunked
SBA loans mean tons of paperwork. This was certainly the case
in years past, but not now. The SBA has done a lot to streamline
its processes, and lenders that specialize in 504 loans have helped
make the application and approval processes no more involved
than any other conventional commercial loan. While the documentation is specific and detailed, borrowers who are organized
and prepared have nothing to worry about.
SBA loans have extra fees. When all closing costs are considered, 504 loans usually average about 25 to 50 basis points more
in total loan fees than a conventional commercial loan. For borrowers with stronger credits, these fees can usually be negotiated
down. Most small business owners have no problem paying these
slightly higher fees to get longer-term, below-market, fixed-rate
financing and the highest cash-on-cash return from their commercial property.
SBA loans take forever to close. Again, this is a myth from the
past. Best-case scenario, a 504 loan can take only 35 days from
the first phone call to the closing table (I’ve seen it done in 26
days by my company previously, and the appraiser wasted many
of those days). Typically, these projects should take an average
of 60 days to close, depending on the borrower and the lender,
perfectly in line with most commercial property contracts.
You may have some other objections in mind (I can think of
at least three more that I hear regularly), but I have limited space
here. Suffice to say that SBA loans are really not much different
from conventional commercial loans, except for the obvious benefits they offer small businesses. And given the dearth of conventional commercial lending and the proliferation of SBA lending,
these old, outdated misconceptions are moot anyway.