Altius Business Solutions

What is the SBA 504 Loan Program?

Small firms can access long-term financing through the 504 loan program to upgrade and purchase substantial fixed assets like equipment or owner-occupied real estate. With SBA involvement, the initiative assists qualified businesses with requests for loans that they might not have otherwise been able to receive. When it comes to real estate, new construction has to be at least 60% owner-occupied, and buildings currently funded by a 504 loan must be at least 51% owner-occupied. Gas stations, restaurants, lodging facilities, hotels, and motels are a few examples of qualified enterprises.

The loans can only be used to purchase or upgrade fixed assets—like real estate, buildings, machinery, and equipment—that a small firm needs for day-to-day operations.

Inventory and operating capital are not eligible uses for loans. Certain situations allow for the refinancing of existing debt, as the section that follows explains. There might also be more limitations on how loan monies are used.

Your firms must function as for-profit enterprises and fulfill the SBA’s size standards to be eligible for an SBA 504 loan. If a business has a typical net profit after federal income taxes for the preceding two fiscal years of less than $5 million and an actual net worth of $15 million or less, it is eligible to apply for SBA financing. A company that speculates on real estate or makes rental investments is not eligible to get loans. There can be other limitations.

The company must also fulfill specific goals related to economic development. Generally speaking, the company has to achieve particular public policy or community development objectives or create or maintain one job for every $65,000 secured by the SBA debenture (or one job for every $100,000 guaranteed for small manufacturers).

What is the Community Reinvestment Act (CRA)?

In keeping with safe and sound banking practices, the Community Reinvestment Act aims to motivate depository institutions to assist in meeting the financial requirements of the locales in which they work, including minimal and moderate-income regions. Congress passed it into law in 1977 (12 U.S.C. 2901), and 12 CFR parts 25, 228, 345, and 195 carry it out.

The CRA small business loan mandates that the track record of each insured depository organization in assisting in addressing the credit needs of its community as a whole be reviewed regularly. When evaluating an institution’s request for deposit amenities, including mergers and acquisitions, that record is taken into consideration. The federal organizations in charge of overseeing depository institutions—the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal Reserve System (FRB)—conduct CRA examinations.

Structure of SBA 504 First Lien Loans

The distinct credit priority structure of SBA 504 first liens allows them to exhibit favorable risk and return characteristics.

• For multipurpose properties, the loan-to-value (LTV) of the first lien cannot be greater than 65%; for hotel and special-purpose buildings, it cannot be greater than 60%.
• The SBA is in a first-loss position concerning the first lien loan since it has a second lien position that can cover up to 40% of the project’s total cost. The SBA has to cancel the first lien loan before it can get any funds from the liquidation to actively safeguard its lien position.

There are upcoming developments that will make earning CRA Credits easier for banks. The Community Reinvestment Act (CRA) rules of the Federal Reserve, FDIC, and OCC were amended by a Final Rule published on October 24, 2023. With only minimal modifications, the agencies are implementing the proposed regulations about bank loans issued in collaboration with the SBA 504 loan program. As of April 1, 2024, the Final Rule is in force.

CRA Credits with the SBA 504 Loan Program

Any bank loan made in connection with the SBA 504 loan program will, according to the Final Rule, instantly qualify as economic development and satisfy the requirements of the Community Development Financing Test to receive CRA credit. This comprises the third-party loan and the bank loans used for the interim funding. As explained on page 191, under the heading “Final Rule,” the agencies are accepting the proposed “Community Development” economic development category with amendments. Three components have been established:

1. Federal, State, local, or tribal governments may collaborate on projects related to government support for small businesses and farms (final § __.13(c)(1)).
   1. This support consists of two subcomponents: (1) loans, investments, and services other than direct loans to small businesses and farms (final § __.13(c)(1)(i));
   2. And (2) direct loans to small businesses and farms (final § __.13(c)(1)(ii)).
2. Support for small farms and businesses through intermediaries (final § __.13(c)(2)), which outlines provisions for small farms and enterprises).
3. Additional assistance to small businesses and farms is covered in final § __.13(c)(3), which deals with providing small enterprises and farms with additional help. Examples of this help include shared space, technology, financial counseling, and administrative support.

The goal is to stimulate bank lending to small enterprises as a means of fostering economic growth and employment creation in the community.

CRA Qualifying Activities

“Direct loans to small businesses and small farms” under component 1. b. above is applicable for the SBA 504 loan program. To be considered economic development under the Community Development Test, bank loans to small firms provided under the SBA 504 loan program—both the interim funding and the permanent third-party loan—must pass size and purpose tests.

• Size Test: The loaned small business must meet the traditional SBA size guidelines for eligibility; alternative or industry-specific size standards may be used. This criterion is met by every small business that receives 504 financing.

Purpose Test: The money obtained from the loan must be utilized to support the creation or maintenance of long-term jobs for people with low to moderate incomes or in census tracts with similar incomes. The Final Rule states that loans made in conjunction with a Small Business Development Company (CDCs and the 504 loan program) or a Small Business Investment Company (SBIC) “presumptively qualify under this prong.” This means that loans made by a bank to specific small businesses or small farms in conjunction or syndication with CDCs or SBICs are presumed to qualify under the purpose test.

Why Growth Corp?

They are aware that obtaining accessible and reasonably priced expansion finance is essential to your success. Their knowledgeable staff takes great satisfaction in improving the lives of small business owners and their staff members. Collaborating with Growth Corp. can be advantageous for startups, established companies, and all in between. This is the reason why:

• They are Chicago’s and Illinois’ top SBA 504 lenders. Growth Corp is also among the top ten SBA 504 lenders in the US regularly.
• They are the nation’s biggest SBA 504 Refinance Lender.
• Following a careful examination of Growth Corp’s policies, practices, and past performance, the SBA approved the company as an Accredited Lender. Growth Corp benefits from accelerated processing of mortgage approvals and closings due to the coveted ALP status, which gives them more ability to handle and close 504 loans.
• They streamline the loan authorization procedure. For you and your bank lender, the entire process is coordinated by our staff, starting with the application and ending with funding, servicing, and closure.
• As SBA 504 Experts, they are. Nearly all of their knowledgeable and receptive staff is dedicated to SBA 504 loans. They have the procedure down to a fine art!
• They’ve collaborated with thousands of companies across a range of sectors. Thus, not much has escaped our notice. They will probably be familiar with your objectives, project structure, and business model, and we will also be aware of the particulars of your case.

Our goal is to support small businesses. They cherish their local communities and think that the cornerstone of their development is small business. They’ll make every effort to help you achieve your business objectives.

Are There Any Loan Or Investment Size Requirements To Get CRA Credit?

Depending on the loan amounts, bank money obtained via the 504 loan program can be eligible for CRA scrutiny. Loans of $1 million or less often fall into the category of small company loans, and banks of all sizes may be subject to the CRA lending test. Small company loans of $1 million or less that fit the statutory definition of community revitalization may be assessed as community development loans by intermediate small banks. Depending on the size of the bank, loans made under the 504 loan program that total more than $1 million are either deemed community-focused loans using the criteria for lending test or the community development test. For a 504 loan to be eligible for Community Reinvestment Act (CRA) assessment as an economic development loan, it must fulfill certain geographic conditions in the rule.

How Does An Investor Get CRA Credit For Investing In The Fund?

If the first lien part of an SBA 504 first lien loan is more than $1 million, the loan qualifies as a community development loan.

Loans to companies over $1 million granted via the Small Business Administration’s 504 Certified Development Company program are an example of a community development loan, though this is not the only one.

• The OCC’s release from March 2017 states that banks offering 504 loans might be eligible for CRA consideration. Loans of $1 million or less often fall into the category of small company loans, and banks of all sizes may be subject to the CRA lending test. Small company loans of $1 million or less that fit the statutory definition of community development may be assessed as community development loans by intermediate-small banks. Depending on the size of the bank, loans over $1 million issued under the 504 program are either regarded as community development loans under the financing test or the community development test.
• One way to satisfy the primary goal of community development as stated in the Federal Register notice (Federal Register/Vol. 75, No. 47, Thursday, March 11, 2010, Notices) is to invest in a fund that provides loans for community development.
• A fund’s equity investment might pass the CRA Lending Test. 
• The lending test may apply to community development loans provided by a third party to whom a company has made a share or equity-type investment.
• (d) Lending from a group or an outside source. Loans for community development that were created or acquired by a group in which the bank is involved, or by a separate entity in which the bank has spent: (1) Will be taken into account, at the bank’s discretion, if the bank discloses the relevant loan data by §25.42(b)(2); and (2) May be distributed among investors or participants in any way they see fit for the lending test, provided that no investor or participant: (i) Has the right to assert a loan origination or acquisition if it is asserted by another investor or participant; or (ii) May be eligible to receive loans that exceed its percentage share of all loans made by the group of companies or third party, depending on how much it invests or participates.
• Because the Fund can designate particular loans to CRA-motivated individuals, investing in the Fund is like making a single loan. If earmarked loans are granted in the bank’s CRA assessment region, they will be eligible for CRA credit equivalent to that of direct loans from the institution.

It is noteworthy to mention that despite the Fund not having any loans in the assessment areas of these banks, at least two banks obtained investing test credit in their CRA exams for their investments in the Fund. Although there is a great deal of variation in the perspectives held by various CRA examiners, these two patterns should support the case. However, it cannot be guaranteed that an examiner in a different situation would respond in the same way.