The Role of the Certified Development Company

Certified Development Companies (CDC's) are regional economic development organizations that are licensed by the U.S. Small Business Administration (SBA). CDC's cover various geographic regions that can range from a single county in a state to a multi-state region. To see a listing of CDC's in your area, click here for our CDC Member Directory. CDC's make loans under the SBA 504 loan program to assist small business. The CDC processes, approves, closes and services the loans. Funding is arranged by the CDC issuing a bond, and in all ways, the CDC is the direct lender for the SBA 504 loan program.
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Eligibility for SBA 504 Loans

• Organized as a for-profit business. The only not-for-profit companies eligible for SBA 504 loans are sheltered workshops.
• Legal entity-corporation, partnership, sole proprietor, limited liability company.
• Any type of legitimate business- manufacturing, wholesale, service, professional service or retail.
• Located in or planning to locate in any area of the United States.
• Small business - either: net worth under $7.5 million & net profits after taxes under $2.5 million or meet SBA's other size standards (by sales or number of employees depending on NAICS code).
• Planning to use the loan proceeds for capital investment (land, building, leasehold improvements, renovation, construction, machinery & associated soft costs). The SBA 504 loan program is not a working capital program. See uses of loan proceeds section for more details.
• Another lender must be willing to participate in the financing. The SBA 504 loan finances up to 40% of the total project cost and the other lender finances 50%. The business or its owner typically puts in 10%. Economic development goals must be achieved through the project being financed. See section on economic development requirements.
• Owner-user of the project being financed (51% occupancy if existing building; 60% occupancy if new construction) Two or more unrelated small businesses may receive a 504 loan to buy or construct a building as long as they, together, will occupy at least 51% an existing building or 60% of new construction.

Companies that are not eligible for SBA 504 loans are: not-for-profit businesses (except sheltered workshops); businesses engaged in lending (such as banks, finance companies); passive holders of real estage and/or personal property; life insurance companies -- however an insurance agency is eligible;) businesses located in a foreign country or owned by aliens; businesses selling through a pyramid plan; illegal businesses; businesses which restrict patronage; government owned entities (excluding Native American Tribes); businesses engaged in promoting religion; consumer and marketing cooperatives (producer cooperatives are eligible); businesses engaged in loan packaging; businesses owned by persons of poor character; equity interest by lender, CDC or associates in applicant concern; businesses providing prurient sexual material; businesses that have previously defaulted on a Federal loan; businesses engaged in political or lobbying activities; and speculative businesses.
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What are the Permitted Uses of 504 Loan Proceeds?

• Acquisition of vacant land for construction of a building
• Acquisition of land and building
• Leasehold improvements
• Renovation of building; addition to building
• Construction of a building
• Acquisition of a commercial fishing vessel or party boat
• Acquisition of heavy duty machinery & equipment (such as printing press)
• Associated soft costs: title searches & insurance; attorneys fees; appraisals; environmental reports; architects; permits;surveys; installation of machinery; points on bridge loans, small amount of furniture and fixtures, etc.
• Not permitted are mortgage broker fees; points on permanent financing;moving expenses.
• Refinancing is not permitted except to take out financing on property acquired within last 9 months with interim funds.

Economic Development Requirements

SBA 504 is a community lending program designed to improve the locality. Eligibility requires either:

1) Job creation or retention (one job per every $50,000 borrowed from CDC under SBA 504)

OR

2) One of the following public policy goals to:

• Revitalize a business district of a community with a written revitalization or development plan
• Expand exports
• Expand minority business development (owned 51% or more by minority business person)
• Aiding rural development
• Change necessitated by federal budget cutbacks
• Change required by mandated standard re health, safety, environment
• Increase productivity & competitiveness (retooling, robotics, or modernization)
• Expand woman-owned business development
• Expand veteran-owned business development

One of the following community development goals to:

• Help to improve, diversify or stabilize the economy of the locality
• Stimulate other business development in the community
• Bring new income into the community
• Assist manufacturing firms
• Assist businesses in a labor surplus area.

SBA 504 is not a real estate investment tool. It exists to help the community by helping small business have an impact on the community-by creating jobs or in other ways benefiting the community.
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Deal Structure -- Financing

You determine the total project cost (hard and soft costs). A bank or other financial institution finances 50% of the cost and takes a first mortgage (lien) position on the assets financed. The CDC, through the SBA 504, finances 40% of the project cost up to a cap and takes a second mortgage position. You can put in as little as 10% equity.

Note: the seller can provide the 50% permanent financing but, under current regulations, the seller must be co-equal to or subordinate to the SBA 504 loan. The 50% can come from a variety of nonfederal sources such as banks, nonbank institutions, government agencies.
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Amount of 504 Loan

The CDC can lend you up to 40% of the project cost with a dollar cap of $1,500,000. CDC can exceed $1,500,000 and go up to $2,000,000 of SBA 504 financing under the following conditions:

• the project will help revitalize a business community with a written revitalization plan or
• the project will help your company to expand its exporting or
• your company is 51% or more minority, woman or veteran owned or
• you are locating in a rural area or
• the project will increase productivity and competitiveness by retooling, modernization or assistance in competing with imports or
• your business was affected by federal budget cutbacks (such as defense downsizing).

CDCs can also lend up to $4,000,000 for eligible manufacturing projects. Back to the Top

Rates and Terms

The rate on the SBA 504 portion is set when the CDC sells the bond to fund your loan. The rate is then fixed for the loan term. 504 bonds are amortized securities. For comparable rates, look at treasury rates. The SBA 504 rates can be found in the About DCFC Section of this web site. The effective rate (APR) will include program fees and a loan loss subsidy.

Loans are ten or twenty years; self liquidating. In order for the CDC to do a 20-year loan, the lender doing the 50% permanent first mortgage must have at least a ten year term. That lender can have a longer payout. Typically, lenders will lend with a 15-20 year term and 20-year payout. For a CDC to do a ten-year loan, the 50% lender must have a term of at least 7 years. Many lenders will match CDC's ten year term.

Principals (owners)

Owners must be US citizens or registered aliens with green card.

Owners cannot be convicted felons currently on probation.

Anyone who owns 20% or more of the operating company must personally guarantee (unsecured general guarantee).

Liquid assets of the principals are taken into account in determining eligibility. Too much liquid assets owned by a principal could disqualify the loan because it will be deemed that the project could be financed by the principal without SBA 504 assistance.
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Collateral

The CDC takes a subordinate (second mortgage) to secure its 40% portion of the financing, and the CDC takes a security interest in assets financed. Key Man life insurance is generally not required unless there is no succession of management. Other assets of the business or principals are generally not required. (unless the company is a startup or the credit is unusually risky or the asset being financed is considered a single purpose asset or doesn't appraise high enough).
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Fees and Payments

All of the fees on the SBA 504 loan are added to the loan amount so that you can amortize their cost over the loan term. You will sign a note for the 40% of project cost plus the fees.

Payments on the SBA 504 loan are made by ACH debit to the borrowers designated checking account on the first of each month after the loan closes. Payments on the 504 loan are separate from your payments on the 50% first mortgage loan.
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Special Notes

There is a prepayment penalty for the first half of the loan term on the SBA 504 loan. In start up situations or single purpose buildings being financed, an equity injection of 15% is required.

The Certified Lender is a permanent lender only. This means the 50% first mortgage lender will have to bridge the Certified Lender's 504 loan portion until the project is complete. The Certified Lender will sell its bond and fund its loan when the c.o. is issued. Interest and fees on the bridge loan can be included in the project costs to be financed.
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Process

Call your CDC and talk to a loan officer to discuss your project. Talk to your bank of account to see if the bank wants to participate by doing the permanent first mortgage and bridge loan. Meet with the CDC loan officer and structure the deal. Submit the CDC application which consists basically of the same materials you will submit to your bank. Basic application materials include:

• 3 years of financial statements and federal tax returns on the company (if in existence for 3 years);
• if there is no historical cash flow ability to service the proposed new debt, submit 2-3 years financial projections;
• personal financial statement (assets and liabilities) on the owners of the company;
• written history of the business, reasons for expansion, plans;
• copy of contract of sale;
• personal history statement of principals indicating citizenship status, etc.

The CDC's staff will investigate and evaluate you and your company. The CDC will draw credit reports, do supplier, bank and trade checks, visit your existing and proposed operations/facilities;assess your credit ability and character. Once your bank or other 50% first lien lender has indicated an interest in financing the 50%, the CDC staff prepares a loan memorandum and presents it to CDC's Board which meets at least once per month (more often if necessary). Once the board approves the project, the CDC presents the application to the SBA to acquire its agreement to guarantee the CDC's bond. This generally takes a few days. The CDC then issues a commitment and your bank closes its first mortgage loan and bridge loan. You take the bank's funds to complete the project. When the project is complete, you close with the CDC and the CDC wires its money to the bridge lender. You then pay the CDC back for the SBA 504 loan. The CDC services the loan for its life.
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Advantages of SBA 504 over Conventional Financing

Low downpayment. Just 10%. Lets you preserve your cash for your working capital. Most banks will lend only 60-70% of the appraised value of the project leaving you to sink in 30-40% plus the cost of renovations plus the soft costs.

Fixed rate on the SBA 504 portion. You don't have to worry about the prime lending rate going up. You can plan because you know the amount of your mortgage payments for the next 20 years.

Long term. CDC 504 loans are for 10 or 20 years. Because the CDC is in second lien position, the bank or other lender doing the 50% first lien loan are willing to lend at a longer term. Longer terms make your monthly payments lower.

Low interest rate. Even with all the fees and closing costs included in the rate, it is still a low rate for a subordinate mortgage loan, particularly for small business. The blended rate as between the bank portion and the Certified Lender's 504 portion makes the project affordable for you.

For the banker wishing to participate as the 50% lender, you get CRA credits; you lend at a lower loan to value ratio; you keep a growing customer happy; you have lower risk because the SBA 504 loan is in second position behind you. The community gets the advantage of keeping or attracting a healthy, growing small business that will be creating jobs and doing other wonderful things in the community.
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You may also wish to visit the SBA website at www.sba.gov/financing/sbaloan/cdc504.html for more information.

SBA 504 Loans are a Win-Win for Everyone!