SBA 504 Debenture Program
| Sample Project | ||
| ABC Enterprises has been leasing a 10,000 square-foot retail space for five years. A comparably-sized building on the same block has just gone on the market for $1,000,000. ABC’s owner, John Smith, wants to make an offer on the building, but he’s uncertain if he can come up with the 25% ($250,000) down payment that would be required with conventional financing. Jane Williams, his long-time lender, has the solution: an SBA 504 loan! Here’s how it works: the bank will finance a $500,000 first mortgage for 50% of the cost, and Certified Development Corporation will finance a $400,000 second mortgage SBA 504 loan for 40% of the cost. Therefore, Mr. Smith’s down payment will only be $100,000, allowing him to conserve his working capital and expand the business. Note that these percentages are subject to change. | ||
| Lender/Borrower | Project Costs |
Percentage of Project Costs |
| First Mortgage | $500,000 | 50% |
| SBA Second Mortgage | $400,000 | 40% |
| Borrower Equity | $100,000 | 10% |
| Total Project | $1,000,000 | 100% |
Equity Requirements | Use of Proceeds | Maturity | Interest
Rates
Fees Relating
to Debenture | Eligibility
Maximum debenture: $5,500,000
Debenture maximum: 40% of project
(subject to the limitations above)
- Debenture secured by 2nd mortgage
- First mortgage lender amount unlimited
- Change in ownership transactions are eligible
Equity Requirements (top of page)
Business must pay 10% to 20% of project costs
- If business over 2 years old and general purpose real estate: 10%
- If business over 2 years old and special purpose* real estate: 15%
- If business less than 2 years old and general purpose* real estate: 15%
- If business less than 2 years old and special purpose real estate: 20%
* as defined by SBA
Use of Proceeds (top of page)
- Purchase major fixed assets such as land, buildings, improvements, long term equipment, construction and renovation
- Soft costs such as architect and engineering fees, interim interest, environmental studies, equipment setup and delivery, and certain legal fees related to the loan
- NOT ELIGIBLE: General working capital, accounts receivable, inventory, debt refinancing, franchise fees and vehicles
Maturity (top of page)
- 10 years on equipment
- 20 years on real estate
Interest Rates (top of page)
- Generally slightly above long-term Treasury Rate
- Based on current market at time of funding for 5- and 10-year Treasury Issues plus an increment above the Treasury Rate
- The debenture rate as of October 2011 is 5.18%
Fees Relating to Debenture (top of page)
- Approximately 3% of the debenture amount and financed with the debenture
- Funded with debenture proceeds
Eligibility (top of page)
- For-profit business
- Tangible net worth not in excess of $15,000,000 and average after tax net profit cannot exceed $5,000,000 for the previous two years
- Job creation or retention requirement: One full-time equivalent job created or retained for each $65,000 of Debenture amount unless a small manufacturer, then 1 job per $100,000
- No excess personal resources