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SCS Capital has bank connections willing to do joint participation loans using the SBA 504 loan program. Affiliated with SCS Capital is Doyle Patton, an agent for a Certified Development Company (CDC), and able to do 504 loans throughout the state of Texas. CDCs are authorized by the SBA to process, administer, and service 504 loans to worthy small businesses. Unlike other SBA loan programs such as traditional 7(a) guaranteed loans, lenders must work in partnership with a CDC to do 504 joint participation loans. SCS Capital can assist in the coordination of all parties.
SBA 504 Loan Basics
Doyle Patton
SBA 504 Loan Officer
(972) 955-0432
dpatton@acciontexas.org
SBA 504 loans must be used for fixed asset projects such as purchasing land and improvements, construction of new facilities or modernization of existing structures, and the purchase of long-term machinery and equipment. The 504 program cannot be used for working capital, inventory, or debt consolidation. Typically, SBA 504 loans are structured as follows:
A private sector lender (usually a bank) provides at least 50 percent of the project costs, and receives a senior lien on 100% of the collateral.
The borrower contributes at least 10 percent equity. A start-up or single purpose building usually requires the borrower to provide 15% equity. For a start-up and single purpose facility, the borrower is normally required to provide 20% equity. Equity usually includes the land, and can involve free assets other than cash.
CDC/SBA loans up to a maximum of 40 percent of the project costs using a SBA debenture, and accepts a junior lien. This is a take out, not a loan guarantee.
Benefits to Borrowers
Low down payment - as little as 10%
Below market, fixed interest rate on SBA portion
Longer payment terms - SBA loan portion is usually 20 years for real estate, and up to 10 years for equipment
Typically no additional collateral required
Loan fees and soft closing costs such as appraisals, environmental studies, title and insurance, architect fees, surveys, equipment installation, points on bridge loans, and construction interest can also be financed in the 504 loan, allowing the small business to preserve working capital.
Benefits to Lenders
Attractive structure - For the 50% bank portion, there are no restrictions on rates or fees, and interest rates can be either fixed or viable. However, the lender portion of the loan must have a term of at least 10 years for real estate, and at least 7 years for equipment
Low Risk - Lender funds only 50%, but retains a first lien position on 100% of the collateral
With SBA sharing the loan, lenders can extend lending limits
SBA 504 small business loans meet the Community Reinvestment Act compliance requirements
Collateral may be less critical in loan qualification decisions
Projected income consideration - Lenders are encouraged to consider projected income of a business in addition to historical cash flows. This is particularly advantageous for growing businesses.
Samples of Acceptable Projects
Office Buildings
Fee simple Business / Medical condos
Medical / Veterinarian Clinics
Manufacturing Facilities
Franchises
Hotels / Motels / Extended Stay
Senior Housing with services
Business Start Ups
Retailers / Wholesalers / Suppliers
Maximum SBA Debenture Amount
There are no restrictions placed on the size of the bank loan. However, the SBA portion is limited to 40% of the total project costs or $1.5 million, whichever is less. Individuals have the same cumulative limit of $1.5 million. As such, a single individual would qualify for one project requiring an SBA 504 loan totaling $1,000,000, and another using $500,000. In most cases, a job must be created for each $65,000 of SBA loan portion.
Public Policy Goals
The maximum SBA debenture amount may be increased to $2.0 million if the project meets one of the SBA’s Public Policy Goals. These public policy goals include loans to women, minorities, and veterans, aiding rural or distressed economic districts, and expanding exports. Modernizing manufacturing facilities, retrofitting to conserve energy, and restructuring due to federal mandates also qualifies as public policy goals. Manufacturing companies may be eligible for debenture funds up to $4.0 million. Notably… the job creation requirement is waived for projects that meet any one of the public policy goals.
Eligible Use of Proceeds
ü SBA 504 loans are for owner-occupied businesses
For acquisitions of existing buildings, borrower must occupy 51%
For new construction, borrower must initially occupy 60% of facility, and 80% within 10 years
ü Acquisition of land (with a plan for construction)
ü Renovate, convert, or expand existing buildings
ü Equipment with a 10 year economic life or higher
ü Professional fees (architect, appraisals, environmental, surveys, title insurance, loan fees, etc.)
ü Repayment of bank's interim points and interest
ü Community improvements up to 5% of construction costs
Ineligible Use of Proceeds
Working Capital
Inventory
Debt Refinance
Goodwill
Self Storage
Residential and Multi-Family Structures
Franchise Fees
Commitment, Broker, and Lender Origination Fees
Equipment with less than 10 year economic life
Speculative Developments
Automobiles, Trucks, Airplanes
Finish out of space not directly used by the borrower
Eligible Businesses
ü Organized as a For-Profit operation
ü Business is under SBA program size standards:
Tangible net worth no more than $8.5 Million; and,
Net profit after tax no more than $3year average
ü Create at least one job per $65,000 of SBA loan portion
ü Business must meet an economic objective
ü Demonstrate general business stability, need, and repayment ability
ü Good credit rating and good character
ü Borrowers with 20% or greater ownership must sign personal guarantees
Ineligible Businesses
Non-Profit Institutions
Businesses engaged in Finance or Lending
Real Estate Development / Passive Ownership in Real Estate
Pyramid Sales Distribution
Government owned entities (except Indian Tribes)
Businesses involved in Political or Lobbying activities
Religious Organizations / Counselors / Missions
Business engaged in any illegal activity
Gambling or Sexually Provocative Enterprise
Private Membership Clubs (not open to the general public)
Borrower has previously defaulted on a federal loan
Lender has an equity interest
Consumer and marketing cooperatives
Interest Rates, Fees, and Structure
Interest rates on SBA 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. Amortization of 10 and 20 years are available. Fees total approximately 3 percent of the debenture and are be financed with the loan.
SBA 504 loans involve two separate loans. The private lender initially funds up to 90% of the project, and then the SBA takes out up to 40% once the construction, remodeling, or acquisition is complete. The process is a win-win for all participants, including economic benefits for the community.
Doyle Patton
SBA 504 Loan Officer
17400 Dallas Parkway, Suite 100
Dallas, Texas 75287
B - (972) 955-0432
F - (214) 432-3005
dpatton@acciontexas.org
www.acciontexas.org
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