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Return of SBA 504 Debt Refinancing Loan Program

A Return of SBA 504 Debt Refinancing Loan Program to Aid Development of Small Business

SBA 504 Loan Program anticipated to begin mid-2016.

Congress recently reinstated the Small Business Administration (SBA) 504 Debt Refinancing Loan Program. The program is expected to begin in three to four months and will allow businesses to refinance or renovate commercial real estate. The loan program can also be used for the purchase of commercial real estate, furniture, equipment and associated soft costs. The program is intended to assist businesses with modernization and expansion by providing favorable financing, including low interest rates and longer amortization periods, to allow money saved to drive business development.

A temporary version of this program was previously very successful in 2012 following the passage of the Jumpstart Our Business Startups (JOBS) Act of 2010. Now the program will be available on a permanent basis.

General Breakdown of a SBA 504 Loan

In a typical 504 loan, the borrowing business will put down ten (10%) percent, which can be derived from equity in the commercial real estate being refinanced. The participating lender contributes fifty (50%) of the loan proceeds with the SBA providing the final forty (40%). Businesses owners are also required to provide a continuing guaranty.

To qualify, a business must be a for-profit company with a tangible net worth of less than $15 million with average net income under $5 million. Additionally, the 504 loan must either (1) create jobs, (2) fulfill community development or public policy goal or modernize or (3) upgrade facilities to meet health, safety and environmental requirements.

If the basis of the loan is job creation, the loan amount is directly tied to the number of new projected jobs, with at least one job created for each $65,000 guaranteed by the SBA. (For manufacturers, every $100,000 guaranteed must create one job).

Alternatively, certain businesses may qualify based on the SBA’s community development or public policy goals: improving, diversifying or stabilizing the local economy; stimulating other business development; bringing new income into the community; assisting manufacturing firms; assisting businesses in area with a labor surplus; revitalizing a business district; expanding exports; expanding small businesses owned by women, minorities and veterans; aiding rural development; and increasing productivity and competitiveness of exports.

Finally, a business may qualify based on the modernization of facilities to meet increased health, safety and environmental standards. This qualification is based on assisting businesses in areas affected by Federal budget reductions, reducing unemployment in areas with labor surplus, reducing energy consumption by at least ten (10%) percent, reducing environmental impact, increasing use of sustainable environmental technology and upgrading equipment or renewable energy sources.

Many businesses will benefit from the 504 Loan Program by being able to reduce their debt service and instead roll those dollars back into the expansion and development of their business. While SBA loans can be complex, an experienced commercial transactions attorney can help walk you through every step of the process.

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.