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How to find low-down commercial construction financing

SBA-504 Loan InfoWhen considering new commercial construction financing or extensive additions and renovations to commercial structures, the benefits of the U.S. Small Business Administration (SBA) 504 loan program should not be overlooked. Here’s how it works:

SBA-504 Loan

If buying or constructing your own building is desirable, one of the SBA’s flagship programs, called the SBA-504 loan, can help you achieve your goal. Kitsap Bank has been assisting clients with obtaining SBA 504 loans since the inception of the program. The loans are designed to help small businesses buy, construct or improve commercial and industrial buildings, as well as buy and install heavy machinery and equipment.

The advantages of a SBA-504 loan are that it offers:

  • A long-term, fixed rate — loans have a 20-year fixed rate term on real estate and a 10-year fixed rate term for equipment.
  • Low interest rates — the effective rate for the 20-year debenture funding was 4.45 percent in August.
  • The low down payment retains capital in the business. Conventional bank loans require a 20 percent to 25 percent down payment or more. The SBA-504 Loan has a minimum down payment of 10 percent — allowing a business to retain the additional 10 percent to 15 percent of conventional down payment requirements for working capital. (The down payment is 5 percent more for start-up businesses and special-purpose properties).
  • There are no balloon payments on the 504 loan.
  • The 504 loan is government-guaranteed. Therefore, the collateral required is normally just the property being constructed or purchased; no additional collateral is needed.
  • Most closing costs such as appraisal fee, environmental fees, loan and contingency fees can be included in the financing.
  • Projected income consideration — projected income of a business can be considered in addition to historical cash flows. This is particularly advantageous for growing businesses expanding into larger facilities.

Structure of loan

The SBA-504 loan has three participants:

  • A lender such as Kitsap Bank provides a first trust deed loan for at least 50 percent of the total project cost.
  • A 504 CDC provides an SBA-guaranteed 504 loan for up to 40 percent of the total project cost, or a maximum of $5 million ($5.5 million for manufacturing businesses and “green” buildings).
  • The small business owner contributes a down payment of at least 10 percent (15 percent for start-up businesses or special-purpose properties).

To qualify, the business must:

  • Be organized for-profit.
  • Be organized as a sole proprietorship, corporation, partnership or limited-liability company (LLC).
  • Have a tangible net worth no greater than $15 million and average net profits after tax less than $5 million in the last two fiscal years.

Owner-occupancy requirements

  • 51 percent owner-occupancy is required within one year of closing for existing buildings.
  • 60 percent owner-occupancy is required upon completion of construction for new construction (and there must be intent to increase to 80 percent owner-occupancy by the 10th loan anniversary).

So, whether you are considering a ground-up construction project or the expansion of an existing facility for owner-occupied business use, you should definitely explore the benefits of using this SBA loan program. It helps a business preserve its working capital for expansion of the business and offers a fantastic benefit, with regard to its long-term fixed interest rate.

For projects greater than $1 million, the SBA portion of the loan can range from $400,000 to $5 million. For manufacturing companies and buildings that meet certain energy initiatives, the maximum SBA loan amount is $5.5 million. These SBA loan limits set the total project cost/size limits at $12.5 million to $13.75 million. For a $12.5 million project this translates to a borrower putting $1.25 million down, the bank lending $6.25 million secured by a first deed of trust, and the SBA lending $5 million secured by a second deed of trust.

Hopefully it is clear from the foregoing information that a wide range of projects will fit within the scope of this program and perhaps more importantly, affordable financing is truly available for construction financing today.

Kerry Keely has more than 37 years of commercial banking experience and is vice president and manager of Kitsap Bank’s SBA Loan Department. If you would like more information or are interested in applying for a SBA 504 loan, call 360-876-7889. Founded in 1908, Kitsap Bank is headquartered in Port Orchard, WA, operating 21 locations throughout Western Washington. With over $900 million in assets, the bank provides a full range of financial services to commercial and individual customers. BauerFinancial, the nation’s leading bank rating and research firm has given Kitsap Bank their 5-star rating; and Kitsap Bank has been named a Preferred Lender by the U.S. Small Business Administration.

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