“This accelerated process enables mortgage brokers to cater to clients with urgent financing needs, ensuring a competitive edge in the market.”

The changes, coupled with improved turn times for loan approvals and an attractive, long-term fixed interest rate, make the CDC/504 program a game changer for commercial mortgage brokers and borrowers. For those not familiar with the SBA system, the CDC/504 loan program provides long-term financing to small businesses for the purchase, improvement or refinance of land, buildings and equipment. These commercial mortgages are administered by certified development companies (CDCs), which are nonprofit entities that are endorsed and regulated by the SBA.

Streamlined process

Beginning in May 2023, the CDC/504 program introduced streamlined and simplified affiliate rules while improving the calculation of the program’s $5 million cap. Under these new rules, ownership-based affiliation takes precedence, allowing businesses greater flexibility in access to SBA financing. Previously, the affiliation determination was based on control and identity of interest, which was sometimes challenging to determine.

Identity of interest is when relatives outside of the immediate family unit can have their ownership of similar businesses considered as affiliates. The new guideline is based solely on ownership percentage and industry, making more businesses eligible for the program and excluding some entities that previously would have counted against an applicant’s $5 million income cap.

“Brokers can now assist business owners who were previously excluded from the CDC/504 program, helping them to secure the funding they need for growth and expansion.”

This change in the affiliate rules opens new avenues for mortgage brokers to provide financing solutions to a wider range of businesses. As trusted advisers, brokers can now assist business owners who were previously excluded from the CDC/504 program, helping them to secure the funding they need for growth and expansion. The streamlined affiliate rules not only simplify the loan process but also enhance the accessibility and inclusivity of the SBA program.

Expanded eligibility

Another significant change to the CDC/504 program is the removal of SBA review requirements for franchises and management agreements. Previously, obtaining agency approval for these arrangements added complexity and delays to the loan process. Franchises and businesses with management agreements often faced additional scrutiny, making it more challenging for them to secure SBA financing.

With the removal of the review requirements, mortgage brokers can now expedite the financing process for clients involved in franchises or management agreements. This change significantly reduces the time and administrative burden associated with the SBA review, allowing for quicker turnaround times and enhanced client satisfaction. CDCs, however, still need to collect franchise and management agreements to confirm they are in effect, since they can impact cash flow.

Mortgage brokers can leverage this change to their advantage by providing swift and efficient financing solutions to clients in the franchise industry or those with management agreements. By simplifying the loan process, brokers can help these clients to promptly seize opportunities, fueling business growth and success.

More leniency

More changes to the CDC/504 program were put in place in August 2023. They refer to the elimination of character clearances and added flexibility around personal liquidity.

• Character clearances. The SBA will run a background check to determine if a borrower is currently on probation, on parole, incarcerated or under indictment. Previously, past felony convictions required applicants to pass a fingerprint check and supply past court documents.

• Personal liquidity. In the past, the SBA sometimes declined projects when there was an abundance of personal liquidity. For example, if the total project cost was $1 million and the owner had $3 million in personal liquidity, the SBA might have declined the loan request with the reasoning that the borrower could obtain conventional financing. With the changes implemented in August, there will be more leniency in these situations, assuming the project meets another “no credit elsewhere” reason such as loan-to-value ratio, property type, new business, etc.

Speedy response

In an industry where time is of the essence, the CDC/504 program has made substantial strides in reducing turn times for loan approvals. Commercial mortgage brokers can now leverage the program’s efficiency, with most approvals being finalized within two to five business days, once the complete application is sent to the SBA.

This accelerated process enables mortgage brokers to cater to clients with urgent financing needs, ensuring a competitive edge in the market. With quicker loan approvals, brokers can facilitate timely transactions, seize time-sensitive opportunities and build stronger relationships with their clients. The improved turn times contribute to increased client satisfaction while positioning brokers as reliable and efficient partners in the financing process.

Additionally, the CDC/504 program offers the ALP Express loan, which provides an expedited loan process for smaller projects. Only select CDCs in good standing are designated to participate in the Accredited Lenders Program (ALP). The ALP Express program is designed for projects of up to $1.25 million, if arranged in the typical 50% first mortgage, 40% 504 loan and 10% borrower contribution structure.

With the ALP Express loan program, the SBA only reviews loan eligibility, leaving the analysis of creditworthiness to the CDC. This streamlined approach greatly speeds up the approval and closing process, allowing mortgage brokers to provide rapid financing solutions to their clients.

Despite the recent upward trend in interest rates, the CDC/504 program stands out by offering significantly lower rates than the prevailing market. This advantageous feature gives mortgage brokers a persuasive selling point. By securing a CDC/504 loan, borrowers can benefit from long-term stability and shield themselves from potential interest rate fluctuations. Mortgage brokers can capitalize on this distinct advantage by positioning the CDC/504 loan as a financially prudent choice, attracting borrowers who seek affordable and predictable financing solutions.

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With the recent changes to the CDC/504 loan program, commercial mortgage brokers should take note of the enhanced features, improved turn times for loan approvals and highly competitive interest rates. The streamlined affiliate rules, the removal of SBA review requirements for franchises and management agreements, and faster loan approvals pave the way for brokers to expand their client base through swift, reliable financing solutions. By leveraging the CDC/504 program, mortgage brokers can strengthen their position in the market, enhance client satisfaction, and unlock new opportunities for growth and success. ●

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The CDC/504 refinance program, which was up-dated in July 2021, allows small-business owners to free up equity in their properties while reducing loan payments.

Express advantage

Wide eligibility

Refinance relief

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The CDC/504 program is a lending solution for business owners to buy, expand or refinance major fixed assets such as commercial real estate or equipment.

Low interest rates

Low downpayments

The CDC difference

Extensive eligibility

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These government-backed loans have played a crucial role in helping small businesses recover during the health crisis. The program offers affordable commercial mortgages with a downpayment of as little as 10% and historically low interest rates that are fixed for up to 25 years.

In today’s economy, small businesses need capital and stability. The recently passed legislation has made it even more attractive to refinance into a low-interest, high-leverage CDC/504 loan, which also can generate cash for your client’s business.

These government-backed loans have played a crucial role in helping small businesses recover during the health crisis.

Program enhancements

Although the SBA was still finalizing the official guidelines this past February, the agency’s 504 purchase and refinance programs qualify for enhancement. These include temporary fee reductions and an extension of federally authorized payment subsidies for new 504 borrowers.

The legislation appropriated $3.5 billion to extend the small-business debt-relief program established by the original Coronavirus Aid, Relief and Economic Security (CARES) Act. For new CDC/504 loans approved by Sept. 30, 2021, borrowers will receive three months of payment subsidies, capped at $9,000 per loan per month. Borrowers with loans that have monthly payments above $9,000 can either wire the remainder or negotiate a repayment agreement with their certified development company (CDC).

Fees will be reduced for all new 504 loans approved between Dec. 27, 2020 and Sept. 30, 2021. This waives the third-party lender-participation fee of 0.5% charged on a bank’s first-position loan. It also waives the CDC processing fee of 1.5%.

As for the CDC/504 refinance loan, there are more lenient eligibility guidelines and flexibilities in refinancing government-guaranteed debt. The recent legislation reduces the required time that qualified debt must be in place for refinance eligibility from two years to six months. In addition, the borrower will not be required to have 12 months of current payments on an existing loan. Eligibility is to be reviewed on a case-by-case basis as part of the credit decision.

Purpose and structure

CDC/504 loans can be used for a number of different purposes, such as the acquisition of existing buildings or land, the purchase of machinery or property modernization. The loan proceeds can’t be used for working capital or to purchase inventory, but a business owner can refinance into a CDC/504 loan and cash out a percentage of the equity in the property, thereby indirectly generating cash for working capital and other purposes.

The loans have a unique structure, consisting of a traditional bank loan of up to 50%, an SBA loan obtained through a local CDC of up to 40% and a 10% equity contribution from the borrower. Startup businesses and single-purpose facilities have traditionally required a slightly higher equity contribution of 15%.

This structure serves two purposes. First, the relatively low equity contribution helps the small-business owner conserve operating capital. Second, the bank takes on relatively little risk, which makes them more likely to lend to a greater range of small businesses at reasonable rates. In addition to the standard purchase loan, the program is a good option for clients looking to get out of high-interest loans or ones with variable rates, short terms and balloon payments.

The refinance program allows small-business owners to cash out equity in their properties. They can refinance existing mortgage debt with combined financing up to 90% of the property’s appraised value. In addition, business owners can obtain up to 20% of their appraised property’s value in cash. These funds can be used for business expenses — including salaries, rent, utilities and inventory — which may be just what your clients need to survive this pandemic.

Broker advocate

It is even possible for your clients to refinance into a CDC/504 loan without any downpayment. For example, say your client has $1.4 million in outstanding conventional debt on a building and needs $200,000 cash for business needs. If the property appraises for $2 million, it would be possible to do a cash-out refinance to obtain the needed funds with no equity infusion. By using a 25-year loan with a fixed, below-market rate, your client can enjoy monthly savings and increased cash flow.

Some of the nuances of the program can be tricky, however, and it is best to reach out to a local CDC during the initial stages of putting a package together. A CDC is a nonprofit corporation built to support economic development within its community through the CDC/504 loan program. They are regulated by the SBA and strive to be the advocate for the small business and mortgage broker throughout the life of the loan. Experienced CDCs can help you market properties and explain the details of the new legislation to potential clients.

This year is the perfect time for you to expand your offerings and inform small-business borrowers about the improvements to the CDC/504 loan program. But it also is worth emphasizing that, as of this past February, the CDC/504 refinance program was still under review and had not finalized its revised regulations, notices and forms. The SBA is expected to provide more information soon. Contact your local CDC for the most up-to-date information regarding the CARES Act relief. ●

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The coronavirus outbreak has left businesses scrambling and desperate for relief. This environment presents the commercial mortgage broker with an ideal opportunity to help clients via the U.S. Small Business Administration (SBA) and its underused CDC/504 loan refinance program, as long as these borrowers aren’t using this option to refinance an existing SBA loan. The CDC/504 program provides a strong solution that can potentially save your clients thousands of dollars each month while unlocking the cash trapped in their equity. Today, with SBA refinance rates at an all-time low (they were below 3% for a 25-year fixed-term loan as of this past April), now is the time to help your clients refinance.

So, the timing is right, the rates are low, but why encourage your clients to use the CDC/504 program to refinance? The answer is straightforward: They’ll get the most bang for their buck. The CDC/504 loan is government-backed financing that comes with unbeatable terms. In March 2020, Congress also passed the Coronavirus Aid, Relief and Economic Security Act (CARES), which provides even more benefits for businesses that act fast to secure a CDC/504 loan.

One of the main benefits of the CDC/504 program is the cost. It offers below-market, fixed interest rates that are amortized over 25 years for up to 90% of the appraised value of commercial real estate.

Unlocking equity

Many small businesses right now are strapped for cash. Many are applying for new loans, but that’s unlikely to be enough. For many businesses, adding commercial mortgage debt through a new loan is simply not ideal or possible at the moment. Consolidating existing debt, refinancing and unlocking trapped equity is a more realistic possibility, however, and can help to remedy the problem.

With a CDC/504 cash-out refinance, your clients can borrow up to 85% of the appraised value of their property. Your clients can use a portion of the funds on qualified business expenses — including salaries, rent, utilities, inventory or other business obligations.

Under the CARES Act, the SBA will make payments for up to six months on new loans that fund by Sept. 27, 2020. Given the program’s funding timeline, however, borrowers will need to act fast to get federal relief. A certified development company (CDC) will need to submit the funding request to SBA by mid-August of this year. So, a borrower will need to complete the application by mid- to late July to qualify for the six-month relief period.

Aside from the immediate benefits from the federal government, CDC/504 loans provide some long-term advantages that make them a good option for borrowers. One of the main benefits of the CDC/504 program is the cost. It offers below-market, fixed interest rates that are amortized over 25 years for up to 90% of the appraised value of commercial real estate. These are long-term, fixed-rate loans with no balloon payments. With stable and predictable operating costs, your clients can accurately budget for years ahead.

Such stability also makes the program an attractive option for a small business looking to consolidate its existing debts. With the CDC/504 program, you can help your client combine all of their loans into one with a low long-term rate, allowing for increased cash flow and significant savings. 

Eligibility requirements

The CDC/504 program’s requirements are often misunderstood. As with a standard CDC/504 loan, most small- to medium-sized businesses that operate for profit in the U.S. qualify for the program. 

The business and its existing loan must be at least two years old and the borrower must have owned the business during those two years. At least 85% of the original mortgage must have been used for a CDC/504 eligible asset, such as owner-occupied real estate, land or equipment. The borrower also must be current on all payments for at least 12 months prior to the refinance application. It is important to note that an existing SBA loan is ineligible for CDC/504 refinancing.

The CDC/504 refinance mortgage is structured like the program’s traditional purchase loan. A lender, typically a bank, covers 50% of the cost through a first-lien mortgage. Up to 40% is covered by a second mortgage from a CDC. The remaining balance of at least 10% comes from the business owner’s equity. For startup businesses and single-purpose facilities, the equity contribution is normally 15%.

The CDC/504 program was established to help business owners who could not get stable, reasonably priced financing elsewhere. In doing so, business owners can conserve operating capital. The program’s structure makes it attractive to financial institutions that otherwise wouldn’t lend to the business. Take, for example, a scenario in which a small-business owner has a $1.5 million debt on their property that is appraised for $2 million and needs $200,000 cash for business needs.

In this case, the owner’s new financing would most likely include a $1 million first mortgage from a bank and a $700,000 second mortgage from a CDC. The existing equity would cover the borrower’s downpayment, while the remainder of the available equity would be converted to cash. With the 25-year term and below-market, fixed-rate pricing of the CDC/504 loan, your client can enjoy monthly savings and increased cash flow.

CDC/504 refinance loans have been available for years, but the program is underused. In fiscal year 2019, for instance, the SBA approved 166 refinances that totaled $154.8 million. Mortgage brokers and borrowers have stayed away from this option for a few reasons. 

First, compared to the broader CDC/504 purchase loan program, the refinance program is not as well-known. Second, there’s an incorrect perception that commercial mortgage refinancing is complex and time-consuming. In fact, the typical time it takes to complete a CDC/504 refinance deal is comparable to that of a conventional loan. There are only a few more forms and a bit more document research to be done on the existing debts being refinanced.

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The CDC/504 refinance program is a powerful tool and a fantastic opportunity for commercial mortgage brokers to expand their product offerings and help small-business clients during this tumultuous time. It is time to use the CDC/504 refinance program to its full advantage, help your clients access trapped equity and capitalize on what the program offers.

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Unmet financing can take many forms. Small businesses may only receive a portion of what they request. 

Others don’t apply because they are discouraged or debt averse. In terms of financing commercial real estate deals, that would likely change if more small businesses knew about a loan program specifically designed for them — the 504 loan offered by the U.S. Small Business Administration (SBA) and a certified development company (CDC). It is one of the best options for small businesses to acquire real estate and equipment. This program also gives commercial mortgage brokers another tool to serve clients faced with a financing challenge.

Small businesses looking to purchase or construct a building are often turned down by a conventional bank or are offered unfavorable terms. The CDC/504 program was established to help the small-business owner with this predicament. The terms of a CDC/504 loan are unbeatable, and it is in your best interest as a commercial mortgage broker to get to know and introduce this program. Not only will your clients be grateful, it is bound to expand your client base. 

Loan-program details

CDC/504 loans enable a business owner to purchase, renovate, construct or refinance commercial real estate with a minimum downpayment of 10%. With this low downpayment, companies can retain precious working capital so their business can continue to grow. 

Unlike most commercial bank loans, CDC/504 loans finance the total project cost. The downpayment can represent as little as 10% of that total. Construction and renovation expenses, equipment, closing costs and soft costs can be rolled into the loan rather than paid out of pocket. This makes a big difference for many small-business owners. 

In some cases, a downpayment of 15% to 20% is required, such as when the loan is used to purchase a single-use property or if the business is less than two years old. This is still significantly less than the downpayment required with conventional financing, which is typically 30% to 35% for multipurpose properties and up to 50% for hotels and other special-purpose properties.

CDC/504 loans are two-tiered in structure and are paired with a conventional loan that will typically cover about 50% of the total project cost. The CDC/504 loan is the portion provided by the SBA. This second-lien mortgage typically represents 40% of the total project cost, has a term of 25 years, a fixed interest rate and is fully amortized for the life of the loan — meaning no balloon payments. Because the monthly payments are fixed for the entire term, this provides your clients with affordable payments and enables them to control overhead costs for the long term. Earlier this year, the typical interest rate was less than 4% for a 25-year loan. 

CDCs are nonprofit organizations that administer the 504 loan program on behalf of the SBA. There are about 240 active CDCs in the U.S. All of them offer the same product with the same fees, but these nonprofits are not all the same. It is a good idea to research the CDCs in your area. When choosing one, you should consider their overall experience — including number of years in service and number of loans approved — as well as client testimonials.

Overall, there are a lot of myths surrounding SBA loans, but the reality is that they are not much different than conventional loans, except for the tremendous benefits they offer small businesses.

Debunking myths 

The name “Small Business Administration” can be misleading as people are often surprised by what the SBA considers small. Program eligibility is based on the business’s net worth and average post-tax profit for the previous two years. Many privately owned, for-profit businesses qualify.

The business also must meet occupancy requirements. To finance the purchase of an existing building, the business must occupy at least 51% of the square footage, or 60% for new-construction projects. There is a bit of wiggle room here as the SBA allows outside yard space to be considered in the overall rentable square footage of the property.

A number of myths about the program are worth debunking. First, CDC/504 loans are not only for small projects. Although the SBA portion (up to 40% of the total project costs) is capped at $5 million, or $5.5 million for energy-efficient or manufacturing projects, there is no limit to the total project cost. Projects in excess of $40 million have been approved for CDC/504 financing.

SBA loans also do not require extensive amounts of paperwork compared to other types of financing. Although this was certainly the case many years ago, the SBA has made significant improvements to the process over the years. The application process is now streamlined and simple for small-business owners. It is no more involved than conventional financing. Apart from a few SBA-specific documents, the CDC/504 loan requires the same documents as the conventional loan that goes with it. Additionally, the support and guidance from the CDC makes the process even easier.

Another myth is that SBA loans take too long to close. The CDC/504 time frame is on par with conventional financing. Many loans are prequalified in three to five days and close in 60 days on average. CDCs typically can work with the borrower’s schedule to ensure deadlines are met.

Overall, there are a lot of myths surrounding SBA loans, but the reality is that they are not much different than conventional loans, except for the tremendous benefits they offer small businesses. Commercial mortgage brokers can increase their number of closed transactions and the value of their product portfolio by introducing the CDC/504 program to their clients. 

Your knowledge of the CDC/504 program can help more small businesses take the leap into property ownership. You also can expect to get more referrals from satisfied small-business clients. 

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The U.S. Small Business Administration (SBA) CDC 504 loan is such a financing tool, and it deserves serious consideration when business owners are looking to construct or expand a building for their operations. This government-backed loan program is designed to help grow the domestic economy through job creation and it can provide small-business owners with an affordable financing option to expand their businesses.

Oftentimes, commercial mortgage brokers turn to bankers to prequalify prospects interested in a construction loan. Bankers often suggest that a prospect go the conventional-loan route, or even suggest an SBA 7(a) loan, which often generates more fee income on the financing side. The CDC 504 loan is often neglected, despite the fact that it could provide the best financing option for your client.

A CDC 504 loan involves three parties: a borrower; a lender (typically a bank); and a certified development company, or CDC. The borrower must contribute a minimum downpayment of 10 percent of the total project cost. The lender provides a first mortgage of up to 50 percent of the financing. The loan terms must conform to SBA criteria, but the lender also can include its own requirements, or overlays. Finally, up to 40 percent of the remaining financing is provided by an SBA-certified CDC.

Great flexibility

There’s a wide range of latitude when it comes to how the proceeds from a CDC 504 loan can be used. The funds can go toward the purchase of land and existing buildings, construction of new facilities, grading, street improvements and parking lots, as well as modernizing or renovating existing facilities. It also can be used for equipment purchases or to refinance existing loans.

The CDC 504 loan is particularly beneficial for larger projects involving new construction, renovations or other improvements, for a number of reasons. Many costs associated with construction or renovation can be financed, for example, including closing and soft costs. There are loads of costs associated with a ground-up project and, unlike with conventional loans, many of these costs can be rolled into the CDC 504 loan.

Interim construction interest, appraisal reports, architectural fees, surveys, engineering fees, platting, contingencies and even moving costs for equipment all can be financed. This allows business owners to keep their cash for other expenditures.

There are some limitations, however. Certain costs cannot be financed, such as taxes and third-party loan fees. A CDC would be a great resource to determine what can or cannot be financed. CDCs are SBA-certified nonprofit organizations that promote economic development within the community through CDC 504 loans.

Ground rules

The CDC 504 loan allows business owners to build a facility larger than they need so they can rent out the extra space. Businesses can increase their monthly cash flow by leasing out up to 40 percent of their newly constructed building for the first three years. After 10 years of occupying the new building, the business must rent out no more than 20 percent of the space.

Construction loans generally require a large downpayment, but only 10 percent down is required with a CDC 504 loan. Most small-business owners are interested in conserving their cash for working capital and this 90 percent financing option allows them to do so.

Because construction loans are considered high risk, conventional construction loans can often require a downpayment as high as 40 percent. Having 30 percent more cash on hand could allow more of your clients to complete the undertaking of a construction project.

As mentioned, the CDC 504 loan is a partnership between three parties: a conventional lender; a CDC, which administers the 504 loan on behalf of the SBA; and the borrower. There is no limit to the total project cost. Although there is a cap on the SBA-guaranteed portion of the loan, there is no maximum set on the bank loan. The SBA-guaranteed portion has a cap of$5 million, or $5.5 million for manufacturing projects and for projects that incorporate energy-saving technologies.

The rate on a CDC 504 loan is locked in for up to 25 years. The CDC 504 rate is below the market rate and has been under 5.5 percent the past four years. There is no balloon payment or call provision, allowing for more control over future overhead costs. Projects are usually secured by the subject property utilizing an “as-proposed” appraisal evaluation. In addition, individuals owning 20 percent or more of the business will be asked to sign personal guarantees.

Loan structure

Because the conventional lender’s participation, as measured by the loan-to-value ratio, will be lower than it would be with a more traditional financing deal, the CDC 504 loan structure enables many lenders to offer better rates and terms.

In many cases, the CDC 504 structure helps businesses secure financing for projects that otherwise may not have been approved. A separate construction loan, for example, is more likely to get approved when the permanent financing through a CDC 504 loan is already approved.

“ In many cases, the CDC 504 structure helps businesses secure financing for projects that otherwise may not have been approved. ” 

It is worth noting that a CDC 504 loan can be used to construct new buildings. With many construction projects, however, the bank typically provides the construction loan, and the CDC 504 loan serves as the follow-on permanent financing. The CDC 504 loan funds when construction is completed.

Now that the advantages and structure of the CDC 504 program are clear, we need to recognize how many of your clients can benefit from this program. A common misconception is that the CDC 504 loan is just for small businesses. While it’s technically a “small-business” program, the generous loan amounts, as well as the net-worth and income limits, make it available to most businesses.

Current SBA guidelines allow a business seeking financing to have a tangible net worth up to $15 million and net after-tax profits of up to $5 million, on average, over the two previous years. Most for-profit businesses are eligible.

• • •

Construction loans are often time-consuming and complex. They require thorough construction notes, such as details related to the builder, a detailed project timeline, floor plans, construction drawings, and costs of materials and labor. CDCs can help commercial mortgage brokers and their clients navigate through the entire process, handling all communication with the SBA.

Many small-business owners are unaware that there is an affordable financing option that allows them to construct a home for their business. Set yourself apart from the competition by introducing your clients to this valuable financing vehicle.

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