Top tip: For small businesses, SBA 504 loans lower the price of entry into real estate

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It took the owner of AutoMile Motors about a year to find a property to buy on US Route 1 in Saco.

Justin “Jay” Gould and a partner were looking for security of the property, rather than a lease, and also wanted to expand the car dealership. The “AutoMile” brand meant the search was limited to just that – a mile-long stretch of Route 1 known to its auto dealerships and services.

“AutoMile Motors has to exist on automatic mileage,” says Gould.

Initially, the partners looked at properties in the range of $ 300,000, an affordable price based on what they assumed would require a 20-25% down payment for a bank loan, with future upgrades paid for out of pocket. when possible.

He approached the NBT Bank in Portland about the funding. There, Wayne Morphew, a senior business banking manager, recommended that Gould enroll in the US Small Business Administration’s 504 program, which offers advantageous loans to borrowers for certain business purposes in combination with a regular bank loan. .

Photo / Courtesy NBT Bank

NBT Bank‘s Wayne morphew says the 504 program helps third-party lenders mitigate risk while allowing them to maintain a top position.

Morphew put Gould in touch with Paul Collins at Granite State Development Corp. in Portland. Granite State is a Certified Development Corporation, a nonprofit organization that administers the 504 program on behalf of the SBA.

Gould has learned that the 504 offers long-term, below-market, fixed-rate loans with a down payment as low as 10%, well below the 20-25% required by a conventional loan.

This broadened his research. When a much larger 20,000-square-foot 1.69-acre building appeared, the loan program allowed Gould to shoulder the price of $ 1.1 million and immediately invest an additional $ 200,000 in renovations to become a turnkey operation.

“It got us into a million dollar property with just 10% down payment,” Gould says. “We’re not big money guys. So, for guys like us, we just had to find $ 110,000 to start building our dream. This has lowered the price of entry into the commercial real estate game.

Building dreams

Helping small businesses achieve their dreams is the goal of the SBA 504 program, through long-term, fixed-rate funding for eligible projects.

In the typical 504 project, a third-party lender – a bank or credit union – finances 50% of the cost with a loan secured by a first lien. An SBA-certified development company, or CDC, finances 40% with a loan secured by a second lien. In most cases, borrowers provide the remaining 10%, although start-up and special-purpose projects require up to 20% equity.

A 504 loan can be used for a range of assets, including the purchase or construction of:

  • Existing buildings or land
  • New facilities
  • Long-term machinery and equipment

Or the improvement or modernization of:

  • Lots, streets, public services, parking lots, landscaping
  • Existing installations

In Maine, loans are primarily used to buy, build or expand commercial real estate, says Diane Sturgeon, deputy district director of the SBA’s Maine district office. The program requires a much lower down payment than conventional bank financing, which allows borrowers to keep more working capital for their business and provide predictable payments over the life of the loan, she explains.

Courtesy / US Small Business Administration

Diane Sturgeon is the District Director of the Maine District Office of the US Small Business Administration.

“Normally, if you’re doing a commercial real estate transaction, the lender looks for a 20-25% down payment,” she says. “For a million dollar contract, that’s a lot for a small business owner. “

“I found a property”

Most transactions start with banks, says Collins of Granite State.

“Banks have a relationship with their borrowers,” he continues. “The borrower says, for example: ‘I found a property that I want to buy’ or: ‘I need this piece of equipment’ or: ‘The owner sells me the building we are in. “

Once it has been determined that the 504 is the right fit for the borrower’s project, CDC and the bank continue with separate underwriting processes.

“I describe the process as the bank doing the credit analysis while we make sure the deal matches the parameters of the SBA 504 loan program,” Collins explains.

The benefits for borrowers include a lower down payment, which allows them to keep their capital working.

“It’s the lifeblood of any business,” says Collins. “It allows them to grow and continue to develop their business. “

Another advantage: the SBA gives a fixed interest on the loan for 20 to 25 years on real estate and 10 years on equipment, which compares favorably to bank loans, which generally have shorter terms and the possibility of an increase in interest rates when the term is reset.

Granite State makes an average of 50 to 70 loans in Maine and 250 to 300 in New England per year under the program. In February, Granite State partnered with 10 SBA-approved projects, including a marina in Lebanon, a Mexican restaurant in Kittery, and a tire recycling company in Fairfield. The total cost of the project ranged from $ 235,000 to nearly $ 9 million. The projects involved seven different banks.

“We have deals statewide – Presque Isle, Machias, Kittery, Bethel,” Collins explains. “It’s the banker who takes care of it. Many borrowers have great relationships with their banks, and when banks recognize an opportunity, they invite us. “

Brewery equipment

Loans in recent months include borrowers in the hospitality, convenience store and manufacturing sectors.

“I’m currently working on a few manufacturing companies,” Collins says. “The majority of the transactions I work on are real estate. A few offers each year are just equipment. Many of these are breweries, as this is usually a large amount for an equipment request only.

One of them was Mast Landing Brewing Co. in Westbrook. Owner Ian Dorsey needed additional fermenters and a five-barrel “brewery” to make pilot batches, as part of a planned expansion. When the pandemic reduced sales of raw products, it also needed more canning machines for its growing retail market. In total, he would need $ 750,000.

Coming from a career in finance, Dorsey had known about SBA programs since the company started in 2015. But he was unaware of the 504 equipment covered as well as real estate. His regular lender, Bangor Savings Bank, suggested the 504 for its lower interest rate and appealed to Collins.

“It was a very flexible program and it was also smooth and fast,” says Dorsey.

From subscription to application, the process took about six weeks. The parties closed together.

Dorsey views the program from both a finance and a small business perspective.

“I think it’s absolutely essential,” he says. “It would be devastating for Maine’s economy and for businesses if these vehicles were to go missing.”

To set up

At Westbrook’s Frog & Turtle Gastro Pub, business was booming before the pandemic. The owners wanted to build a second floor to increase capacity. Without the 504, they wouldn’t have been able, says Guy Côté, one of the pub’s partners.

Côté stumbled upon the program in an article, spoke with his bank, Evergreen Credit Union, and with the Southern Maine Finance Agency, a CDC in Biddeford. “Everything fell into place for what we wanted to do,” recalls Cote.

The interest rates on a single conventional loan “would have put the project out of reach,” he says.

Côté found that it took about six months to get the loan. “There were a lot of obstacles to overcome,” he says. But, he adds, he had a lot of help navigating the process.

“It can take a long time,” agrees Southern Maine Finance Agency president Will Armitage. “Because of the federal component, there are a few more steps than with a conventional loan. But in the end, when you get approved, you get a lower interest rate and down payment.

Armitage explains how a loan works with and without the 504. Suppose a borrower needs $ 950,000 for material costs (real estate, renovations, equipment) plus $ 50,000 in ancillary costs (fees and taxes), for a total of $ 1 million in total.

With 504 financings:

  • The third party lender provides 50% Where $ 500,000.
  • Portion 504 is 40% Where $ 400,000.
  • The borrower contributes ten% Where $ 100,000.

With traditional financing:

  • The third-party lender provides 80% hard costs, or $ 760,000.
  • The borrower contributes 20% hard costs more 100% ancillary costs, i.e. a total of $ 240,000, Which one is $ 140,000 more than the 504 agreement.

Peace of mind

NBT Bank’s Morphew, who worked on the AutoMile deal, says the 504 program is good for banks, helping them mitigate risk while allowing them to maintain a top position. At the same time, borrowers “don’t have to worry about putting all their savings into a project,” he says. “They don’t have to worry about their savings being depleted.”

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