Commercial Loans Blog

SBA to Guarantee 504 First Mortgages

Posted by George Blackburne on Mon, Jun 28, 2010

New Loan Poolers Will Help Jump Start Secondary Market for 504 Loans

The U.S. Small Business Administration (SBA) announced the first nine loan pool originators authorized by the agency to assemble and sell pools of 504 program first mortgage loans, a major step to jump starting a secondary market that should make fixed-asset financing more widely available for small businesses. The new program was approved under the American Recovery and Reinvestment Act.

Prior to the recent disruption in the credit market, a private secondary market for these loans existed, but it has not revived as the economy has started to rebound. The SBA expects this new program to breathe life into that secondary market and improve access to credit for small businesses by providing a resource that can help boost liquidity to small business lenders.

"With the resources provided in the Recovery Act, we have engineered a turnaround in its SBA lending, putting nearly $30 billion in the hands of small businesses across the country," said SBA Administrator Karen Mills. "This added support to re-launch the 504 first mortgage secondary market builds on that success and will help leverage even more capital for small businesses to support their growth and create new jobs."

Under the program, the SBA will provide a government guarantee on pools of portions of eligible 504 first mortgage loans assembled by approved pool originators to be sold to third-party investors. Lenders will retain at least 15% of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%.

Typically, a 504 project includes three elements: a loan (or first mortgage) secured with a senior lien from a private-sector lender covering up to 50% of the project cost, a second mortgage secured with a junior lien from a Certified Development Company (backed by a 100% SBA-guaranteed debenture) covering up to 40% of the cost, and a contribution of at least 10% equity from the small business borrower.

Under the new program, portions of the senior liens are pooled by pool originators and sold to investors in the secondary market. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after February 17, 2009. The program will be in place until February 16, 2011 or until $3 billion in new pools are created, whichever occurs first.

The pool originators approved so far are

• Bank of America, N. A. of New York, New York;
• Cantor Fitzgerald & Co. of New York, New York;
• Citizens Bank of Elizabethton, Tennessee;
• Coastal Securities, Inc. of Houston, Texas;
• Community South Bank of Knoxville, Tennessee;
• Fidelity Bank of Covington, Georgia;
• Meadows Bank of Las Vegas, Nevada;
• Morgan Stanley Bank, N.A. of Salt Lake City, Utah; and
• Voyager Bank of Eden Prairie, Minnesota.


Need an SBA loan right now?  Please call George Blackburne III at 574-360-2486 or email him at george@blackburne.com.

Topics: SBA 504 loan, SBA loan, 504 loan

SBA 504 Construction Loans

Posted by George Blackburne on Tue, Oct 14, 2008

These Partially-Guaranteed Construction Loans Are Still Getting Done

As a result of current banking crisis, very few commercial construction loans are getting funded. I have warned commercial mortgage brokers extensively, in this blog and on the main C-Loans website, not to waste precious time trying to place commercial construction loans or residential subdivision construction loans. There is one exception to this rule.

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If a commercial property will be 51% owner-used, it is still very possible today to obtain an SBA 504 construction loan. More precisely these loans are known as CDC/504 loans.

Despite the name, these loans are not made by the Small Business Administration. Instead, SBA 504 (CDC/504) loans are made as a conventional first mortgage loans with a piggy-back second mortgage that is recorded concurrently.

The first mortgage is actually made by a conventional lender, typically a bank. The piggy-back second mortgage is also typically the bank or 504 lender for about 45 days, but then the second mortgage is assigned to a Certified Development Corporation and guaranteed by the Small Business Administration.

After the construction period, the underlying conventional construction loan converts to a long term conventional permanent loan. This loan is often fixed for five to ten years and is typically amortized over 25 years. The conventional loan will typically have a term of 10 to 25 years.

The piggy-back second mortgage is always fully-amortized over 20 years and is written at a government-subsidized interest rate about 1.5% lower than the typical conventional commercial first mortgage.

The big advantage of an SBA 504 loan is that the owner only has to contribute 10% of the total cost of the project, including loan fees and other soft costs. The owner can often include some heavy equipment costs in his total project cost, meaning that he gets to buy some heavy equipment at low commercial real estate loan interest rates. In contrast, on a conventional commercial construction loan, the owner usually has to contribute 20% to 35% of the total project cost.

You can apply to 50 SBA 504 lenders using C-Loans.com.

Topics: CDC/504 loans, CDC loans, Certified Development Company, commercial construction loan, construction loan, SBA 504 loan, SBA loan, small business loan