Commercial Magazine

Get the Lowdown on CDC 504 Financing

This SBA-guaranteed loan program can help get borrowers’ construction projects off the ground

By Kurt Chambliss

Constructing a building can be a huge financial undertaking for a small business, an undertaking that many business owners believe is out of their reach. If they realized this could be accomplished through a government-backed lending program that requires only a 10 percent downpayment, however, more business owners would likely go this route, and you, as a commercial mortgage broker, could close more loan deals.

The U.S. Small Business Administration (SBA) CDC 504 loan is such a financing tool, and it deserves serious consideration when business owners are looking to construct or expand a building for their operations. This government-backed loan program is designed to help grow the domestic economy through job creation and it can provide small-business owners with an affordable financing option to expand their businesses.

Oftentimes, commercial mortgage brokers turn to bankers to prequalify prospects interested in a construction loan. Bankers often suggest that a prospect go the conventional-loan route, or even suggest an SBA 7(a) loan, which often generates more fee income on the financing side. The CDC 504 loan is often neglected, despite the fact that it could provide the best financing option for your client.

A CDC 504 loan involves three parties: a borrower; a lender (typically a bank); and a certified development company, or CDC. The borrower must contribute a minimum downpayment of 10 percent of the total project cost. The lender provides a first mortgage of up to 50 percent of the financing. The loan terms must conform to SBA criteria, but the lender also can include its own requirements, or overlays. Finally, up to 40 percent of the remaining financing is provided by an SBA-certified CDC.

Great flexibility

There’s a wide range of latitude when it comes to how the proceeds from a CDC 504 loan can be used. The funds can go toward the purchase of land and existing buildings, construction of new facilities, grading, street improvements and parking lots, as well as modernizing or renovating existing facilities. It also can be used for equipment purchases or to refinance existing loans.

The CDC 504 loan is particularly beneficial for larger projects involving new construction, renovations or other improvements, for a number of reasons. Many costs associated with construction or renovation can be financed, for example, including closing and soft costs. There are loads of costs associated with a ground-up project and, unlike with conventional loans, many of these costs can be rolled into the CDC 504 loan.

Interim construction interest, appraisal reports, architectural fees, surveys, engineering fees, platting, contingencies and even moving costs for equipment all can be financed. This allows business owners to keep their cash for other expenditures.

There are some limitations, however. Certain costs cannot be financed, such as taxes and third-party loan fees. A CDC would be a great resource to determine what can or cannot be financed. CDCs are SBA-certified nonprofit organizations that promote economic development within the community through CDC 504 loans.

Ground rules

The CDC 504 loan allows business owners to build a facility larger than they need so they can rent out the extra space. Businesses can increase their monthly cash flow by leasing out up to 40 percent of their newly constructed building for the first three years. After 10 years of occupying the new building, the business must rent out no more than 20 percent of the space.

Construction loans generally require a large downpayment, but only 10 percent down is required with a CDC 504 loan. Most small-business owners are interested in conserving their cash for working capital and this 90 percent financing option allows them to do so.

Because construction loans are considered high risk, conventional construction loans can often require a downpayment as high as 40 percent. Having 30 percent more cash on hand could allow more of your clients to complete the undertaking of a construction project.

As mentioned, the CDC 504 loan is a partnership between three parties: a conventional lender; a CDC, which administers the 504 loan on behalf of the SBA; and the borrower. There is no limit to the total project cost. Although there is a cap on the SBA-guaranteed portion of the loan, there is no maximum set on the bank loan. The SBA-guaranteed portion has a cap of$5 million, or $5.5 million for manufacturing projects and for projects that incorporate energy-saving technologies.

The rate on a CDC 504 loan is locked in for up to 25 years. The CDC 504 rate is below the market rate and has been under 5.5 percent the past four years. There is no balloon payment or call provision, allowing for more control over future overhead costs. Projects are usually secured by the subject property utilizing an “as-proposed” appraisal evaluation. In addition, individuals owning 20 percent or more of the business will be asked to sign personal guarantees.

Loan structure

Because the conventional lender’s participation, as measured by the loan-to-value ratio, will be lower than it would be with a more traditional financing deal, the CDC 504 loan structure enables many lenders to offer better rates and terms.

In many cases, the CDC 504 structure helps businesses secure financing for projects that otherwise may not have been approved. A separate construction loan, for example, is more likely to get approved when the permanent financing through a CDC 504 loan is already approved.

“ In many cases, the CDC 504 structure helps businesses secure financing for projects that otherwise may not have been approved. ” 

It is worth noting that a CDC 504 loan can be used to construct new buildings. With many construction projects, however, the bank typically provides the construction loan, and the CDC 504 loan serves as the follow-on permanent financing. The CDC 504 loan funds when construction is completed.

Now that the advantages and structure of the CDC 504 program are clear, we need to recognize how many of your clients can benefit from this program. A common misconception is that the CDC 504 loan is just for small businesses. While it’s technically a “small-business” program, the generous loan amounts, as well as the net-worth and income limits, make it available to most businesses.

Current SBA guidelines allow a business seeking financing to have a tangible net worth up to $15 million and net after-tax profits of up to $5 million, on average, over the two previous years. Most for-profit businesses are eligible.

• • •

Construction loans are often time-consuming and complex. They require thorough construction notes, such as details related to the builder, a detailed project timeline, floor plans, construction drawings, and costs of materials and labor. CDCs can help commercial mortgage brokers and their clients navigate through the entire process, handling all communication with the SBA.

Many small-business owners are unaware that there is an affordable financing option that allows them to construct a home for their business. Set yourself apart from the competition by introducing your clients to this valuable financing vehicle.


  • Kurt Chambliss

    Kurt Chambliss is executive vice president of TMC Financing, a certified development company (CDC) that has provided real estate financing in Arizona, California, Nevada and Oregon for more than 40 years. TMC Financing offers commercial real estate buyers up to 90% financing by utilizing the U.S. Small Business Administration's CDC/504 loan program. TMC is a top-ranked CDC in the nation, providing more than $10 billion in financing for more than 6,000 businesses. 

You might also like...