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Deciphering Government-backed Commercial Property Loans (Part 2 of 2)

Deciphering Government-backed Commercial Property Loans (Part 2 of 2)

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  •   Nov 20, 2017
Government-backed Commercial Estate Loans (Part 2 of 2)

In our previous blog, we talked about how entrepreneurs can leverage government-backed loans through SBA to purchase real estate for their business. These commercial property loans aim at helping small businesses grow by providing them with easy-to-avail and affordable finance.

We shed some light on the first type of loan which business owners can use for purchasing commercial property – SBA 7(a). Now, let’s take a look at another popular loan option which can be used for the same – CDC/SBA 504.

  • CDC/SBA 504

It is an SBA loan program which provides fixed-rate, long-term loans of up to $14 million for funding fixed assets, such as building and land. What distinguishes it from 7(a) is the fact that the proceeds from 504 cannot be used anywhere except for commercial property or heavy equipment.

All the loans approved under this program are funded by two lenders;

        1. Banks, Credit Unions, Non-Banking Financial Companies (NBFCs) – 50% of the project cost

        2. Community Development Corporation (CDC) – 40% of the project cost

The remaining 10% comes from the borrowers’ pocket, usually in the form of cash down payment.

Minimum Requirements

If someone wants to secure a 504, then they need:

        * Credit score over 660;

        * Down payment of 10%;

        * To have tangible net worth under $15 mil and average net income below the $5 mil mark after federal taxes for two preceding years;

        * Not be engaged in speculation or investment in rental real estate;

        * Not have funds available from other sources;

        * Demonstrate the ability to repay the loan on time from the projected operating cash flow of the business.

In addition to these, if a 504 is employed to purchase commercial property, at least 51% of it must be occupied by the owner. For instance, you cannot purchase a mall and fully rent it out to tenants. But you can purchase a retail space and rent out some part of it.

Loan Amount, Interest Rate, & Repayment Term

When we talk about 504 as a commercial real estate loan, we basically refer to two different loans – the first one being 50% put forward by the traditional lender and the second being 40% contributed by the CDC. Both the loans will have separate terms.

CDC Portion

  • Tenure of the loan has to be 10 or 20 years;
  • Interest rate on 10-year loan – 3.2% fixed; 20-year loan – 3.7% fixed.

Traditional Lender Portion

  • Interest rate will be around 4-8%;
  • Typically, these loans have a 5-10 year term, but get amortized over 20-25 years;
  • While such amortization schedule also means low monthly payments, it typically leads to a large balloon payment at the time of maturity.

> The combined maximum loan size for a project is capped at $14 mil. However, the borrower can take more than one 504 loan at a given time for multiple projects. The total maximum debt can be $20 mil.

Use of Loan Proceeds

According to the guidelines set forth by SBA, CDC/SBA 504 loan can be used for:

        * Buying commercial estates (buildings and land).

        * Improving commercial property (like upgrading roads and utilities).

        * Constructing new facilities.

        * Modernizing existing facilities.

        * Converting existing facilities.

        * Purchasing heavy and long-lasting equipment.

One thing worth noticing is how restricted a CDC/SBA 504 is as compared to an SBA 7(a). The proceeds from a 504 cannot be used for debt refinancing, investment or non-owner occupied real estate, working capital, etc.

Choosing between 7(a) and 504

If a borrower needs funds for financing leasehold improvements or working capital, then the options get limited to 7(a). However, if the debt is to be used for purchasing a building, constructing from the ground-up, renovating a building, or purchasing heavy machinery and equipment, then the mortgagor should definitely look at the 504 program.

The 504 was originally designed so that small businesses could finance the commercial property for their operations. On the flip side, the 7(a) was actually intended for high-risk loans such as acquiring a business, working capital, furniture and fixtures, etc. They were deemed as risky bet owing to the weak, limited, or even no collateral pledged by the borrower.

This was all about government-backed commercial property loans for small business owners. If you are looking for the best terms for a commercial real estate mortgage, then partner with the leading Commercial Property Loan Provider in California – Arrow Financial. To get a free quote, call us at +1 (951) 634-2477 or drop a message on

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