The Buffalo and Erie County Industrial Land Development Corporation offers the SBA 504 loan program which is designed to provide long-term, below market fixed rate second mortgage money for expanding businesses. It is normally used in conjunction with conventional bank financing to provide up to 90% of project cost financing. 504 loans are closed and funded upon project completion, so a source of interim funds to complete the project is necessary. 504 loans are funded by the sale of debentures by the federal government. The project must have a significant impact in its community and meet at least one of the following economic development objectives:

1. Create at least one job opportunity for each $35,000 of 504 loan assistance.
2. Stimulate other identifiable business development in the community, or bring new income into the area or assist a community in diversifying and stabilizing its economy.
3. Involve business district revitalization, expansion of exports, expansion of minority business development, rural development, enhanced economic competition (applicant involved in advancement of technology, plant retooling involving expansion or modernization of manufacturing facilities, conversion to robotics or competition with imports), location or expansion in an area impacted by Federal budget cutbacks, or business restructuring arising from Federally mandated standards or policies affecting the environment or the health and safety of employees.

Eligibility

     Most types of proprietorships, partnerships, corporations and growers' cooperatives are eligible provided they have tangible net worth under $5,000,000 and average earnings after taxes for the preceding two fiscal years under $2,000,000. Generally ineligible are nonprofit enterprises and businesses that involve speculation or gambling or activities such as investment, lending, or pyramid sales. Specific project eligibility will be determined after the feasibility meeting. The acquisition of existing land, buildings, machinery or equipment, building expansion and new construction as well as soft costs generally qualify. Leasehold improvements may be eligible.

Loan Program

     Normally 40% of the project cost can be financed by a 504 loan. Loans range from $50,000 to $1,000,000 and in certain circumstances can go as high as $1,300,000. For any project at least 50% of the project must be financed by a bank loan and at least 10% must be injected as equity by the applicant or its principals. Loans are for either 10 or 20 years dependent on the asset being financed. Interest rates are fixed at closing and are about 2% over either the 5-year Treasury (for a 10 year loan) or the 10-year Treasury (for a 20 year loan). The interest rate includes fees charged for servicing and bookkeeping. The collateral is usually a second mortgage or security interest in real estate and/or machinery and equipment. Personal guarantees are required for all persons controlling 20% or more of the applicant and may be required for persons controlling 5% or more. Key man life insurance may be required. Prepayment is allowed but may involve prepayment penalties.

Restrictions

     Proceeds may not be for working capital and generally not for debt repayment. Machinery and equipment financed must have a useful life of 10 years or more. Companion bank project financing must generally have the same term as the 504 loan. It is expected that the applicant will eventually use all of the space funded by the 504 loan. For new construction up to 33% of the building may be leased to another tenant. Upon purchase of existing facilities, 51% of the space must be occupied by the applicant and no proceeds of the 504 loan may be used to remodel or convert the rental space. A minimum of 50% of any project financed by an SBA loan must come from non-Federal sources. Funds from tax-exempt obligations issued by State or local government qualify as non-Federal provided they are not guaranteed by the Federal government. Loans made by the Buffalo and Erie County Regional Development Corporation are considered to be Federal financing.

Application Procedures

     Feasibility meeting with applicant to outline proposed project and determine eligibility. Upon determination of eligibility, applicant will receive a list of required information for the complete application. The completed application is submitted to ILDC for evaluation. ILDC prepares a recommendation and forwards the application to ESCDC and SBA for their approval. ESCDC may add or modify loan terms and conditions during the approval process. After ESCDC's written authorization, the project can commence using interim funding.

Loan Closing/Fees

     An application deposit of $500 (for loans up to $250,000) and $1,000 (for loans over $250,000) is required. This deposit is refundable at closing. All costs of the 504 loan can be added to the loan amount and generally add 3% to the amount of the loan. Closing costs include a reserve deposit (1/2 of 1%) refunded upon full payment of the loan, a funding fee (1/4 of 1%), a loan processing fee (1.5%), an underwriting fee (0.64%), and ESCDC's counsel fees limited to 1%. The bank must pay SBA a one-time fee of ½ of 1% on its 50% loan amount. Upon project completion, a closing will be scheduled.

Revised: 06/01/02