A Commercial Mortgage With Only 10% Down?

If you're a small business owner who is considering buying commercial space, you might want to know about a program that can finance up to 90% of commercial property acquisitions — the Small Business Administration’s 504 Loan Program. A certified development corporation (CDC), in partnership with a bank, can provide fixed-rate, low-down-payment financing for building acquisitions, construction and equipment purchases. Financing up to 90%, rather than the more traditional 60% to 75%, preserves precious cash and makes buying property a viable alternative.

Here’s how it typically works: A business owner takes a 50% first mortgage from a bank or other lending institution, then gets a 40% second mortgage from a certified development corporation. This means the purchaser needs to come up with only a 10% down payment on the property. There are additional benefits to the program. Because the SBA program lowers the lending risk for banks, loan approval may be easier. Also, closing costs as well as certain project development costs may be included in the project financing. There’s an added bonus: the CDC mortgage is exempt from the mortgage recording tax. In New York City, that saves buyers from 2.05% to 2.8% of the loan amount.

The fixed-rate loans are fully amortizing, with no balloon payments, 20 years for real estate, 10 years for machinery and equipment. Interest rates are competitive: As of December, the 20-year fixed rate on the CDC portion of a mortgage ranged from 6.09% to 6.54% depending on the servicing fee charged by the CDC.

The CDC’s 40% second mortgage has caps: $1.5 million for standard loans and $2 million for public policy loans (such as for minority-owned, women-owned or veteran-owned businesses, those located in rural or economic development areas or businesses that export). The cap for loans for manufacturing companies is $4 million.

The following eligibility requirements apply to 504 loans:

• Tangible net worth not more than $7,500,000.
• Average net profit not more than $2,500,000 for the last two years.
• For existing buildings, at least 51% must be owner-occupied. No loan proceeds can be used to make specific improvements to the non-owner-occupied space. In determining owner occupancy, the owner can be a real estate holding company leasing to an affiliated operating company. For new construction, only 40% or less may be leased to an unrelated tenant and at least 60% must be owner-occupied.
• The equity requirement increases to 15% for start-ups (less than two years old) or special-purpose real estate. If both situations exist, 20% equity is required.
The fee for a 504 loan is approximately 3% of the CDC loan amount, but it’s useful to remember that the fees are fully financed. The program is not available for most not-for-profits. As the program is intended for long-term property acquisition, there are pre-payment penalties.

Resources: Most CDCs work with, rather than compete with, a bank. A commercial lender should be able to provide access to the 504 program. If your bank is unable to provide the first mortgage, your regional CDC may be able to assist in structuring a financing package. SBA 504 programs are national; a list of certified development corporations participating in transactions in your area can be found at www.nadco.org. Additional program information is available at www.nybdc.com.