Bargain: For small businesses, SBA 504 loans lower the cost of entering real estate.



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

Justin “J” Gould and his partner wanted a guarantee of ownership, not a lease, and also wanted to expand the showroom. The AutoMile brand meant that the search was limited to just that – a mile long on Route 1, known for its car dealerships and services.

“AutoMile Motors has to exist on the rally,” says Gould.

The partners initially considered properties in the $ 300,000 range, an affordable price based on what they anticipated would require a 20% to 25% down payment on a bank loan, with future upgrades paid out of pocket when possible.

He approached NBT Bank in Portland for funding. There Wayne Morphue, Senior Business Banking Specialist, recommended Gould to apply for the US Small Business Administration 504 program, which provides borrowers with lucrative loans for specific business purposes in combination with a regular bank loan.

Photo / Courtesy of NBT Bank

NBT Bankwith Wayne Morphue says the 504 program helps third-party lenders reduce risk by allowing them to retain their first bond.

Morphue connected Gould with Paul Collins of Granite State Development Corp. in Portland. Granite State is a Certified Development Company, a non-profit organization that operates the 504 program on behalf of the SBA.

Gould learned that the 504 provides long-term, fixed-rate, below-market loans with an initial payment of 10%, much lower than the 20% to 25% required for a regular loan.

This broadened his search. When the much larger 20,000-square-foot 1.69-acre building came along, the loan program allowed Gould to take on the $ 1.1 million price tag and immediately invest another $ 200,000 in renovations to become a turnkey enterprise.

“This allowed us to get only 10% of the million dollar property,” says Gould. “We’re not big money guys. So for guys like us, we only needed $ 110,000 to start making our dream come true. This lowered the cost of entering the commercial real estate game. “

Build dreams

The goal of the SBA 504 program is to help small businesses make their dreams come true through long-term, fixed-rate funding for eligible projects.

In a typical 504 project, a third party lender — a bank or credit union — funds 50% of the value of the loan secured by the first collateral. A certified development company licensed by the SBA, or CDC, finances 40% with a loan secured by a second pledge. In most cases, borrowers provide the remaining 10%, although startups and specialized projects require up to 20% of the capital.

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

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

Or improvement or modernization:

  • Land, streets, communications, parking lots, landscape design.
  • Existing facilities

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

Courtesy of / US Small Business Administration

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

“Typically, if you do a commercial real estate transaction, the lender requires 20% to 25% cash,” she says. “For a million dollar deal, that’s a lot for a small business owner.”

“I found a property”

Most deals start with banks, Granite State’s Collins explains.

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

Once the 504 is determined to be suitable for the borrower’s project, CDC and the bank undertake separate underwriting processes.

“I describe this process as an analysis of the bank’s creditworthiness while making sure that the transaction meets the parameters of the SBA 504 loan program,” says Collins.

Benefits for borrowers include a lower down payment, which allows them to maintain working capital.

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

Another plus: SBA provides fixed interest on loans for 20 to 25 years on real estate and 10 years on equipment, which compares favorably with bank loans, which usually have shorter terms and the possibility of increasing interest rates when the term changes.

Granite State provides an average of 50 to 70 loans in Maine and 250 to 300 in New England per year as part of the program. In February, Granite State partnered on 10 SBA-approved projects, including a Lebanon marina, a Mexican restaurant in Kittery and a tire recycling company in Fairfield. The total cost of the project ranges from $ 235,000 to almost $ 9 million. Seven different banks participated in the projects.

“We’ve done deals all over the state – Presque Isle, Macias, Kittery, Bethel,” Collins says. “It’s a banker. Many borrowers have excellent relationships with their banks, and when the banks recognize the opportunity, they attract us. ”

Brewing equipment

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

“I am currently working on several manufacturing plants,” says Collins. “Most of the deals I work on are in real estate. Several deals each year are just equipment. Many of them are breweries because it is usually a large dollar amount for a request for equipment only. ”

One of them was the Mast Landing Brewing Co. in Westbrook. Owner Ian Dorsey needed additional fermenters and a five-barrel brewhouse for pilot batches – part of the planned expansion. When the pandemic wiped out rough sales, he also needed more canning equipment for his burgeoning retail market. In total, he will need $ 750,000.

With a financial career, Dorsey has known about SBA programs since starting the business in 2015. But he didn’t realize that 504 covered equipment as well as real estate. His regular lender, Bangor Savings Bank, offered 504 because of the lower interest rate and brought in Collins.

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

The process took about six weeks between underwriting and filing. The parties made the closure together.

Dorsey views the program both through the lens of finance and through the lens of small business.

“I think this is absolutely important,” he says. “If these cars go away, it will be devastating to Maine’s economy and business.”

Falling into place

At Frog & Turtle gastro pub in Westbrook, business flourished before the pandemic. The owners wanted to build a second floor to increase the capacity. Guy Cote, one of the pub’s partners, said they couldn’t have done it without 504.

Cat came across this program in an article, spoke to his bank, Evergreen Credit Union, and the South Maine Financial Agency, CDC in Biddeford. “Everything fell into place for what we wanted to do,” Kot recalls.

The interest rate on a regular loan alone “would make the project unattainable,” he says.

Cote found that it took about six months to get the loan. “There were a lot of difficulties,” he says. But, he adds, they helped him a lot to navigate this process.

“It can take a long time,” agrees Will Armitage, president of the Southern Maine Finance Agency. “Due to the federal component, several steps are required more than using a regular loan. But in the end, when you get approval, you get the benefits of a lower interest rate and a lower down payment. ”

Armitage explains how a loan is issued with and without a 504. Let’s say a borrower needs $ 950,000 for basic expenses (real estate, renovations, equipment) plus $ 50,000 for soft costs (fees and taxes), for a total of $ 1 million.

With funding 504:

  • Third party lender provides fifty% or USD 500,000
  • Part 504 40% or USD 400,000
  • The borrower contributes 10% or USD 100,000

With conventional funding:

  • Third party lender provides 80% hard costs, or USD 760,000
  • The borrower contributes twenty% from heavy costs plus 100% soft costs, or in total USD 240,000, which the USD 140,000 more than a 504 trade.

Peace of mind

NBT Bank’s Morphue, who worked on the AutoMile deal, says the 504 program benefits banks by helping them mitigate risk while still allowing them to retain their first pledge rights. At the same time, borrowers “don’t have to worry about putting all their savings into a project,” he says. “They don’t need to worry about their nest egg being depleted.”


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