The SBA 504 loan – Franchise financing for commercial real estate & capital asset acquisition

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When franchisees Brad and Risa May first began to explore the financing options available to them for their Goddard School franchise, they assumed they would be leasing their building.  Instead, they were delighted to find out they could finance and build  their own facilities using long-term, fixed rate financing through the U.S. Small Business Administration’s 504 Loan Program.

SBA 504 loans provide long-term (10 or 20 year) financing to small businesses for the purchase, construction, and renovation of buildings and can also be used to fund large machinery and equipment purchases.  504 loans are arranged by Certified Development Companies (CDCs), funded by the sale of bonds on Wall Street, and guaranteed by the Federal government.

The Mays learned of the SBA 504 loan program through their bank and with the low down payment required, they were able to finance the $2.5 million construction of a new 10,000 sq. ft. facility on 1.3 acres in Chantilly, Virginia.   According to Brad May, “When we first looked into buying a franchise, I assumed we would be leasing a building.  In essence, by constructing our own buildings, we built our own retirement!”
Seasoned franchisee, Marnie Carabell, owns eight Buffalo Wild Wings franchises in Virginia.  She recently used an SBA 504 loan to purchase and renovate her most recent Buffalo Wild Wings restaurant in Spotsylvania, Virginia, and it is the first building she has owned. 

Eligibility for an SBA 504 loan is straightforward.  Your franchise must have an average net worth under $15 million with average annual net profits under $5 million.  You must also be a U.S. citizen or have permanent legal status. 

There is no limit to the total project cost for a 504 loan, however, the SBA-guaranteed portion is limited to 40% of the project cost.  The maximum dollar cap for the 504 loan is $5 million but that can go as high as $5.5 million if your project incorporates energy saving technologies for sustainable design.  Another advantage of a 504 loan is that you can finance certain soft costs like architect/engineering fees, interim interest and appraisal/feasibility studies so there is less out-of-pocket expense at closing. 

Here is how it works.  With an SBA 504 loan, private capital is blended with government bond funds to provide an attractive long-term fixed asset loan with a maturity of 20 years for real estate and 10 years for machinery or equipment.  504 loans are pooled and sold monthly on Wall Street to large institutional investors giving SBA 504 borrowers the opportunity to access long-term capital at very attractive interest rates usually reserved for Fortune 500 companies.

SBA 504 loans consist of three components.   The CDC provides 40% of the project cost, the franchisee typically contributes 10% and a bank or other lender finances the remaining 50%.   There is a higher down payment required if you have been in business for less than two years or if your building is a “special purpose” property.  Each of these instances increases the down payment by 5% so, for example, if you are a new business your down payment would increase to 15% and if you finance a special purpose building, your down payment goes up to 20%.  The interest rate for the 504 loan is determined when the loan pool is sold on Wall Street and the rate is fixed for the life of the loan.

Also, if you project involves purchasing and/or renovating an existing building, your franchise must occupy at least 51% of the property.  If you construct a new facility, you must occupy initially occupy 60% – increasing to 80% occupancy within two years.   You will always have the option of renting out at least 20% of the property which can bring in added revenue.

To learn if an SBA 504 loan could work with your franchise plans, contact the nearest CDC to discuss your project.   CDCs normally have a number of banking partners they work with to provide the 50% bank loan but they can also work with your bank if they are interested in participating.  The CDC prepares all documents and handles all details including, packaging, approval, closing and servicing your SBA 504 loan. 

Start thinking about owning your facility instead of renting!  It’s possible with an SBA 504 loan.

Visit www.nadco.org – the website of the trade association representing the nation’s Certified Development Companies – the National Association of Development Companies  (NADCO).  You will find contact information for CDCs in your area and additional information on the SBA 504 Loan Program on the website.

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