How Do Commercial Construction Loans Work?

The SBA 504 Loan – Commercial Construction Loans

The SBA 504 Commercial Construction Loan allows Small and Mid-Sized Businesses to build an “owner occupied” commercial property from the ground up or to expand an existing facility.

“Owner Occupied” for SBA construction loans means your business occupies 60% or more of the new space. (51% for an existing building).

100% Financing

100% Financing is available for established businesses for general purpose or multi-use buildings as well as doctors, dental practices, veterinary clinics, self storage/mini storage and occasionally for a few other businesses including funeral homes and independent pharmacies.

10% Down Commercial Financing – 90% Loan to Cost

The 504 construction loan offers great leverage
which helps you preserve capital, maximize tax deductions and control your overhead.

Most business owners are interested in conserving cash when it comes to commercial financing and the 504 loan allows to keep more of your working capital than most any other available commercial loan.

SBA Construction Loan Benefits

  1. The SBA 504 loan allows 10% down payment or equity injection for commercial construction projects and you can come out of pocket the down payment or use land that you already own as equity. (If you’ve owned the land for 2 years or more you may be able to use current appraised value).
  2. The 504 allows you to finance construction costs, closing costs and soft costs including interim construction interest, architectural fees, surveys, title insurance, engineering fees and even moving costs associated with calibrated equipment allowing business owners to keep their cash for other expenditures.
  3. The 504 allows you to finance the cost of long-term machinery and equipment with a useful life of greater than 10 years. This is a big benefit for any business utilizing expensive equipment to manufacture products or provide services.
  4. The 504 program offers long-term amortizations – typically 25 years for the first mortgage and 20 years for the second mortgage. The second mortgage is a “below market” fixed rate and there is no balloon or call provision on either loan. It is a “one and done” proposition – there is no “re-qualifying” later – allowing you to better control your overhead and plan for the future.
  5. The 504 allows you to initially lease up to 40% of your newly constructed space to another business and for existing buildings you can permanently lease up to 49% of the commercial space.

The 504 Loan – Not Just For Small Businesses

The 504 is technically a “Small Business” program, but the generous loan amounts* and net worth and income limits make it available to mid-sized businesses.

Current SBA guidelines allow a business to have a tangible net worth up to $15 million and net – after tax – profits of up to $5 million on average for the last 2 years.

Large Project? Go Green

The 504 allows higher loan amounts and the ability to fund multiple projects if you use or produce renewable energy or if you make a building 10% more energy efficient.

Multiple projects upwards of $15,000,000+ (possibly as high as $20 million) are possible and there are numerous local, state and Federal incentives for building green or for retrofitting a building to make it more energy efficient…or using or producing renewable energy.