I wanted to provide some additional details on the Small Business Administration (“SBA”) 504 energy efficiency loan program that was first referenced by Sibley Fleming on June 4th, 2009 since many borrowers and mortgage brokers have asked about it lately.
Over the past couple of months, two small business borrowers have been able to obtain real estate financing through the SBA 504 loan program by reducing their energy consumption. Financing was obtained for the new construction of a retail center totaling approximately $9 million and the acquisition of an existing warehouse totaling approximately $8 million using the SBA 504 loan program.
The SBA 504 loan program is one of the few consistent sources of capital for real estate construction and acquisition projects today and because of recent changes to the program, project sizes can now be up to $10 million if an energy efficiency or renewable energy generation project is implemented as part of the business plan.
In general, the SBA 504 loan program provides small businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A Certified Development Company (CDCs) is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses.
Typically, a project financed using the SBA 504 loan program includes a loan secured with a senior lien from a private lender, e.g., Wells Fargo or Bank of America, covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business. Private banks benefit from the program because they lend on only 50 percent of the project and are in a more secured position. Borrowers benefit by being required to provide only 10% equity.
Proceeds from SBA 504 loans must be used for fixed asset projects such as: purchasing land and improvements, including existing buildings, construction of new facilities, or modernizing, renovating or converting existing facilities.
With recent changes to the loan program, borrowers are able to qualify for up a $4 million SBA loan debenture. At this SBA loan size, qualified borrowers can utilize the SBA 504 loan program for projects up to $10 million if an energy efficiency or renewable energy generation project is implemented as part of the business plan. Otherwise, without the energy efficiency project, the maximum SBA 504 exposure is $1,500,000.
Interest rates on SBA 504 loans are based on a spread above the current market rate for five-year and 10-year U.S. Treasury issues. Maturities of 10 and 20 years are available. Fees total approximately 2.15 percent of the debenture and are financed with the loan. The American Reinvestment and Recovery Act has reduced these fees for a limited time.
To be eligible, the borrower’s business must be operated for profit and fall within the size standards set by the SBA. The business qualifies as small if it does not have a tangible net worth in excess of $8.5 million and does not have an average net income in excess of $3 million after taxes for the preceding two years. The business must occupy at least 51% of the building being purchased, if existing; or for ground up construction, 60% now and 80% within the near future. Loans cannot be made to businesses engaged in speculation or investment in rental real estate. Hotels are allowable.
For more information on SBA 504 energy efficiency loan program qualification visit:
Tony Liou is the president of Partner Energy (www.ptrenergy.com) a nationwide provider of building energy audits, energy efficiency and renewable energy consulting and implementation services.