SBA Real Estate Investment Loan
The Small Business Administration (SBA) offers low rate loans for qualified real estate investors. The loans are not for most investors, but under the right circumstances the SBA loans can be a great deal. Below are the details:
A 504 loan can be used for:
- The purchase of land, including existing buildings
- The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping
- The construction of new facilities or modernizing, renovating or converting existing facilities
The purchase of long-term machinery and equipment
A 504 loan cannot be used for:
- Working capital or inventory
- Consolidating, repaying or refinancing debt
- Speculation or investment in rental real estate
To be considered for Certified Development Company(CDC)/504 loan, applicants must meet these eligibility requirements:
- Operate as a for-profit company
- Do business (or propose to) in the United States or its possessions
- Has a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years.
- Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
- Be an eligible type of business. While the vast majority of businesses are eligible for financial assistance from the SBA, some are not. Check this list of eligible and ineligible types of businesses to see if your company qualifies.
- Under the 504 Program, Plan to use proceeds for an approved purpose. CDC/504 loan proceeds may be used for the financing of fixed assets like real estate or equipment. This list explains Eligible and Ineligible Use of Proceeds.
- Not have funds available from other sources. SBA does not extend financial assistance to businesses when the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing. Both business and personal financial resources are reviewed as part of the eligibility criteria. If these resources are found to be excessive, the business will be required to use those resources in lieu of part or all of the requested loan proceeds.
- Ability to repay the loan on time from the projected operating cash flow of the business
- Good character. SBA obtains a “Statement of Personal History” from the principals of each applicant firm to determine if they have historically shown the willingness and ability to pay their debts and whether they have abided by the laws of their community
- Relevant management expertise
- Feasible business plan
Maximum loan amounts are determined by how funds will be used based on which goal they support from the list below:
- Job Creation – The maximum SBA debenture is $5 million for meeting the job creation criteria or a community development goal. Generally, your business must create or retain one job for every $65,000 provided by the SBA, except for small manufacturers, which have a $100,000 job creation or retention goal (see below).
- Public Policy – The maximum SBA debenture is $5 million or $5.5 for small manufacturing or when meeting the public policy goals of energy reduction or alternative fuelsl. Examples of public policy goals include:
- Business district revitalization
- Expansion of exports
- Expansion of minority business development
- Rural development
- Increasing productivity and competitiveness
- Restructuring because of federally mandated standards or policies
- Changes necessitated by federal budget cutbacks
- Expansion of small business concerns owned and controlled by veterans (especially service-disabled veterans)
- Expansion of small business concerns owned and controlled by women
- Small Manufacturing – The maximum debenture for small manufacturers is $4 million. A small manufacturer is defined as a company that has its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS) and all of its production facilities located in the United States. To qualify for a $4 million 504 loan, your business must meet the definition of a small manufacturer and accomplish one of the following:
- Create or retain at least one job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)]
- Improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act]
Generally, the project assets being financed are used as collateral. Personal guarantees of the principal owners are also required.
Maturity terms of 10 and 20 years are available.
Interest rates on 504 loans are pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues.
Fees total approximately 3 percent of the debenture and may be financed with the loan.