General Information Questions:


Q: What is the SBA 504 loan program used for?

A: The program is a way for borrowers to access permanent financing for the purchase of real estate their business will occupy. It can also be used for the business fixed equipment if it has a useful life of at least 10 years.

Specifically, the program can be used to:

Purchase land & existing building
Purchase land and build a new building
Renovate or expand the business’ existing building
Purchase machinery & equipment with at least a 10 year useful life
Make an asset based company acquisition

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Q: How does the 504 program work?

A: The lender typically provides 50% of the project financing, and Premier Capital 40%, leaving the borrower with a contribution of 10%.
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Q: How does the lender partnership work?

A: Please view the SBA 504 Process page for information on this topic.
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Q: Will the closing be delayed if the 504 loan is used?

A: With complete information and documents, we can pull together the loan package relatively quickly. The timing often depends on obtaining the appraisal and environmental reports as early as possible. All things being equal, Premier Capital routinely meets the demands of a 45-day turn around. We encourage you to bring us into the process early in order to discuss the project timing.

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Q: Is Premier Capital Corporation part of the SBA?

A: No. Premier Capital is a private not-for-profit company that is authorized by the SBA to deliver and administer the 504 program for projects in the state of Indiana and Kentucky. Premier Capital was established in 1976 and is one of the top 504 lenders in the nation. There are approximately 250 such companies across the U.S. known as Certified Development Companies, or CDCs.

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Q: What if the borrower’s project is already underway, can the borrower swith to the 504 program?

A: There is a nine month look back provision in the 504 program. Any expenses that have occured in the past nine monthe can be included in the project.

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Q: Is there a limit as to how much the 504 program will lend to an individual borrower?

A: Yes, however, there are no maximums on the size of the project, only on the portion that can be funded by the 504 program. The limitations are:

$5.0 million on most projects
$5.5 million, per project,  if the company is a manufacturing with NAICS codes of 31, 32, or 33 or if the company meets the SBA energy policy criteria.

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Advantage Questions:


Q: What are the advantages for minority-owned, woman-owned and veteran-owned businesses?
A: Job creation requirements are relaxed.
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Q: Why should a borrower consider using the 504 program?
A: The benefits of the 504 program to a business include a low down payment, longer loan terms, and larger loan amounts than may be available through a conventional loan. In most cases, the borrower’s down payment will be 10% of the project costs. In addition, interest rates on the 504 loan are typically below market and fixed for the duration of the loan term (10 years for equipment and 20 years for real estate).
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Q: Why should a lender structure a project with a 504 program?

A: The 504 program can mitigate risk by putting the lender in a first mortgage position at 50% loan-to-value. A lender can also use the 504 program to offer potential borrowers an option to conventional financing, which typically requires between 20% – 25%. Use our Comparison Calculator to compare the 504 to a conventional loan.

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Structure Questions:



Q: What are the advantages for minority-owned, woman-owned and veteran-owned businesses?
A: Job creation requirements are relaxed.
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Q: Is it possible to purchase both real estate and equipment at the same time using an SBA loan?
A: Yes, in two possible ways. It is possible to prepare “companion” 504 loans, one 20-year loan for the real estate, and another 10-year loan for the equipment. Or, if the weighted useful life of the equipment does not “drag” the overall life of the project below 20 years, we can prepare a single application that includes both real estate and equipment.
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Q: Can a holding company or eligible passive company (EPC) be formed to own the real estate?
A: Yes. SBA allows for individuals, trusts, LLCs, corporations or partnerships to hold title to the project property so long as it is leased to the operating company and meet all eligibility requirements.
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Q: What are Occupancy requirements?
A: For existing property the borrower business must occupy at least 51% of the building. If new construction the business must initially occupy 60% and 80% in the long term.
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Q: What are SBA’s requirements regarding the loan terms from the participating lenders?
A:

SBA Loan Term Minimum Lender Loan Term
20 years 10 years
10 years 7 years

The lender loan must not have an early call feature unless the loan is in default. The lender loan must NOT be open ended.
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Q: What types of equipment are eligible?
A: As a general rule if the equipment is less than 45-48% of the real estate project, the equipment can be included in the real estate project. If only equipment is being purchased, then the equipment must have a useful life of at least 10 years.

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Q: What is used to collateralize the loan?
A: The property or equipment being purchased. Additionally, an assignment of Key Man life insurance may be required.
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Q: What is the difference between a 504 loan and 7(a) SBA loan?
A: Use our Comparison Calculator to see the difference between these two types of loans.
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Q: What are the Appraisal requirements?
A: SBA requires an appraisal on almost all projects. Typically Premier Capital will utilize the appraisal ordered by the bank as long as it meets the appraisal requirements set forth by SBA. Those requirements are: The appraiser must be independent and state certified; the appraisal must conform to Uniform Standards of Professional Appraisal Practice (USPAP); and the appraisal may be complete, which details three valuation methods, or limited, which does not cover all three methods. However, SBA requires a minimum of two approaches, costâ and comparable sales. All appraisals must be ordered and certified to your lender and no older than one year.
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Q: What can be included in a 504 project?
A: Land, building, renovation cost, if applicable, professional and soft cost related to the project.
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Q: Are Inventory costs or Goodwill eligible?
A: No, however, the SBA 7(a) loan can be used for these items and the 504 program for the real estate.
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Q: Can the 504 be used to refinance existing debt if the project meets the eligibility requirements?
A: Sometimes. When the Project Property is land and building, and it was acquired less than nine months before the application is received by SBA, the financing used to acquire the land and building could be considered “interim financing” and be eligible to be paid-off with 504 loan proceeds.
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Q: Who must personally guarantee the loan?
A: All individuals or entities with at least a 20% ownership will have to fully guarantee the loan.
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Q: What are the Environmental requirements?
A: SBA requires an Environmental Investigation of all commercial property upon which a security interest is offered as a security for a loan. The type and depth of an Environmental Investigation to be performed varies with the risk of contamination, if any. The depth of the environmental analysis will be determined by the lender and submitted to Premier Capital as early in the process as possible. All environmental investigations must be ordered and certified by the lender and no older than one year.
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Q: Will the closing be delayed if the 504 loan is used?
A: With complete information and documents, we can pull together the loan package relatively quickly. The timing often depends on obtaining the appraisal and environmental reports as early as possible. All things being equal, Premier Capital routinely meets the demands of a 45-day turn around. We encourage you to bring us into the process early in order to discuss the project timing.
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Q: How is the interest rate determined for the 504 portion of the loan?
A: All 504 loans across the nation are pooled and a large bond sale occurs on a monthly basis. The fixed rate on the 504 loan is determined by the size of the bond issue and current market conditions, always taking into account the U.S. Government guarantee. The interest rate is determined at the time the bond sale occurs, typically 30-45 days after closing. The effective rate, including all on-going fees, is roughly equal to the 10 year Treasury Bill rate plus approximately 2.25 to 3.4%.
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Q: Is it permissible for two or more owners
(such as two doctors each owning his/her own practice)
to jointly purchase a building using the SBA 504 loan program and then lease back space to their individual businesses?
A: While it IS permissible for two (or more) unrelated owners to purchase or construct a building together, then each lease back a portion, borrowers should keep one important fact in mind: in order to qualify, each person who owns 20% or more of the building OR of the operating companies must offer a full personal and corporate guaranty on the entire project.

Another possibility would be for the two owners to turn the building into a condominium, with separate legal descriptions. In this way, each person will be asked to guaranty own his/her own portion of the building.
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Q: An Employee Stock Ownership Plan (ESOP) owns a portion of the stock of the corporation and the individual borrower the remainder.
The individual borrower plans to own the real estate personally and lease it to the corporation.
Must the ESOP provide a guaranty for the loan?

A: If the ESOP owns 20% or more of the corporation at the time of application, then a guaranty would be required. If the ESOP cannot provide such a guaranty, then the SBA loan could not be to an eligible passive company.

The SBA may occasionally waive the requirement for a guaranty from an ESOP if the 504 loan has been made to the operating company.
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Q: Is there a limit as to how much the 504 program will lend to an individual borrower?
A: Yes, however, there are no maximums on the size of the project, only on the portion that can be funded by the 504 program.

The limitations are:

  • $5.0 million on most projects
  • $5.5 million, per project, if the company is a manufacturing with NAICS codes of 31, 32, or 33 or if the company meets the SBA energy policy criteria.

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Q: Can the borrower rent out some of the space in the building?
A: Yes. If the project is an existing building the borrower can rent out 49% or the building. If the project is new construction the borrower can rent out 20% of the building.
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Q: Can the borrower combine a 504 loan and a 7(a) loan?
A: Yes. However, the SBA limitations apply to the aggregate of the both loans.
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Equity Questions:


Q: What is the minimum down payment required for a 504 loan?
A: A minimum injection of 10% is required for most 504 projects. However, a 15% injection is necessary when a business is a start-up (less than 2 years old) or when the project property is considered special-purpose. A 20% injection is required in situations involving both a start-up business and a special-purpose property.
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Q: Can seller-subordinated financing be used as the equity portion of the project?
A: Yes, however, in addition to subordinating to the bank and SBA, the seller will be required to sign a Standby Agreement disallowing principal payments and interest on the loan. If the applicant has made several years of prompt payments on the SBA loan, and the cash flow and financial condition both support it, a servicing request to the SBA to begin allowing principal payments to the seller might be approved.
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Q: What if the borrower’s project is already underway, can the borrower switch to the 504 program?
A: There is a nine month look back provision in the 504 program. Any expenses that have occurred in the past nine months can be included in the project.
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Q: Can existing equity in the Project Property be used as all or a portion of a borrower’s injection?
A: Yes. The Borrower’s injection may be existing equity in land (including buildings, structures and other site improvements that will be part of the Project Property) previously acquired by the borrower.
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Q: If a borrower buys a building for less than market value, can they use the difference between the two as all or part of their equity injection?
A: No, the project value will be based on the lower of cost or appraised value.
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Q: If land bought several years ago is worth more now, can the borrower contribute the land to the building construction project as equity? Will it be valued at cost or market value?
A: Land may be used as the equity injection in the project. The appraised value may be used if the land was acquired more than two years prior to the application date and the appraisal is accompanied by a title report covering the sale history for the past five years. Otherwise, the lower of cost or market value must be used. The borrower’s contribution may include the buildings and site improvements on the contributed land as long as they are used in the project.
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Fee Questions:


Q: What fees are associated with the 504 program?
A: There are three types of fees:

  • The fees rolled into the monthly payment are equal to 2.16% of the SBA loan amount.
  • There is also an up-front lender fee equal to .5% of bank loan amount that is paid at the SBA closing.
  • Premier Capital has a closing fee of $1,500 in Indiana and $2,500 in Kentucky.

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Q: Are there additional closing costs when using the 504 program with Premier Capital?
A: Premier Capital Corporation’s attorney certifies the transaction, as required by the SBA. His fee is $1,500.
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Q: Is there a prepayment penalty if the 504 loan is paid off early?
A: Yes, however, the amount of the prepayment penalty decreases each year and disappears after year five for a 504 loan with a 10-year maturity and after year 10 for a 504 loan with a 20-year maturity. Partial pre-payments are not allowed.
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Q: Can the 504 loan be assumed?
A: Yes, as long as the SBA has an opportunity to review both corporate and personal financial information on the proposed borrower(s) in advance of the sale. One note of caution: the release of the original borrower’s personal guaranty is NOT automatic with a loan assumption.
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Credit Questions:


Q: Who must personally guarantee the loan?
A: All individuals or entities with at least a 20% ownership will have to fully guarantee the loan.
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Q: Do the guarantors have to be located in Indiana?
A: No.
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Q: What are the credit requirements the borrower must meet for a 504 loan?
A: The borrower must meet both the bank and Premier Capital’s credit criteria, generally cash flow coverage of 1:1 and leverage no greater than 10:1
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Eligibility Questions:

 


Q: What can be included in a 504 project?
A: Land, building, renovation cost, if applicable, professional and soft cost related to the project.
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Q: Are Inventory costs or Goodwill eligible?
A: No, however, the SBA 7(a) loan can be used for these items and the 504 program for the real estate.
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Q: Do franchises qualify for the 504?
A: Yes, if the franchise is approved by the SBA. To check to see if a franchise is on the approved SBA list go to the following web site: www.franchiseregistry.com. If the franchise is not listed on the web site contact Premier Capital.
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Q: Can any business or borrower use the 504 program through Premier Capital?
A: No. There are eligibility requirements for the 504 program. Below are the most common requirements:

  1. The business must be a for-profit company located in Indiana and Kentucky. Borrowers, those with at least 20% ownership, must be U.S. Citizens or permanent resident aliens.
  2. If the business is an existing business, the net worth cannot exceed $7.5 million and the average net income over the past two years cannot exceed $2.5 million
  3. Below are samples of projects that are ineligible for the 504 program:
    • Non-profit companies
    • Real estate development or other speculative businesses
    • Finance companies e.g., banks, check cashing or finance companies
    • Pyramid sales distributions
    • Businesses that limit membership for reasons other than capacity
    • Businesses deriving more than 1/3 of gross annual revenues from legal gambling
    • Religious based businesses
    • Businesses or owners that have defaulted on a federal loan e.g., student loan
    • Business of prurient sexual nature

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Q: Are hotels eligible?
A: Generally yes, as long as the hotel has been historically profitable, is an SBA approved franchise, in a good location and the borrowers have experience operating a hotel and will be the owner/operators.
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Q: Are Gas Stations with Deed Restrictions eligible for financing?
A: No. Restrictions on the brand of service station to be operated on the premises are not acceptable to the SBA either as part of the purchase and sale agreement or if already contained in covenants running with the land.
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Q: Is property being financed on a Land Contract with the seller eligible?
A: Only if the property is unimproved land.
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Q: Can the 504 be used to refinance existing debt if the project meets the eligibility requirements?
A: Sometimes. When the Project Property is land and building, and it was acquired less than nine months before the application is received by SBA, the financing used to acquire the land and building could be considered “interim financing” and be eligible to be paid-off with 504 loan proceeds.
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