FINANCING OPTIONS: Certifed Development Company (CDC) (504) Program CERTIFIED DEVELOPMENT COMPANY (CDC) (504) PROGRAM The CDC program is an economic development loan program designed to assist in the development and expansion of small firms and the creation of jobs. This program provides government-backed financing for a portion of the fixed asset needs of small businesses with a fixed interest rate loan, which generally results in a lower over all debt service requirement for the borrower. Another portion of the fixed asset needs are financed by independent lenders, with a final portion coming from the borrower's contribution. The actual 504 loan is provided by a Certified Development Company (CDC) assigned to operate within a specific geographic territory. The loans are long-term, low down payment, reasonably priced fixed-rate loans which are provided to healthy and expanding businesses. Loan proceeds may be used for plant acquisition, construction, conversion or expansion; for the rehabilitation of commercial structures; and for the purchase and installation of machinery and equipment with a useful life of 10 years or more. In addition, certain "soft costs" can be paid with loan proceeds, including interim interest costs, professional fees for items such as appraisals, surveying, accounting, engineering and architectural services. However, this program does not provide funds for general working capital needs so these funds come from either the business itself or from another loan. The 504 loan finances only a portion of a project, which is defined as the funds needed to acquire, construct, convert, or expand a plant, plus site improvements and land acquisition. The CDC's share of the project amount cannot exceed $750,000 or 40 percent of the total project cost, whichever is less. A private or a non-federal governmental financial institution provides a non-government-backed first position loan of at least 50 percent of the project. An example of a typical project would be the acquisition of a building costing $800,000 from which the business will operate. Under the 504 concept, a commercial lender would finance $400,000 and secure this loan with a first position mortgage. The CDC would provide up to $320,000 in financing, and the borrower would contribute no less than $80,000. Businesses which are ineligible for 504 loans include those engaged in gambling, lending or investment, or which are nonprofit concerns. In addition, applicants purchasing existing commercial real estate must occupy a minimum of 51 percent of the building's total square footage, while applicants constructing commercial real estate must occupy at least two-thirds of the total square footage initially and 100 percent within 10 years. This program has two size standards. To be eligible, the small businesses size can either be one that has a net worth that does not exceed $6 million and average annual net profits after taxes over the past two years that does not exceed $2.0 million, or be able to qualify under the size standards for 7(a) applicants. The 504 program is an economic development financing program designed to stimulate private sector investment in long-term fixed assets which will increase productivity, create new jobs, and increase the local tax base. The financing is provided by at least two lenders. This program is administered through SBA-Certified Development Companies and requires at least a 10 percent contribution from either the CDC or the borrower. A higher contribution is required by law for start-up businesses or when a unique- or single- purpose building will serve as the primary collateral. Additional borrower contributions can also be required as a matter of credit. The 504 loan program also has a jobs requirement. The applicant must show that they will either create or retain at least one job for every $35,000 of debenture proceeds. The debenture proceeds constitute only a portion of the total financing involved in a 504 project. In the example above for the $800,000 building with the 504 loan for $320,000 (debenture amount), the applicant firm must be able to show that they will create or retain at least 10 jobs. The actual math is 9.14 jobs but if the applicant could only show that they will create or retain 9 jobs, the debenture could be for no more than $315,000. The maturity for any 504 loan is either 10 or 20 years, and is determined by the useful life of the assets being acquired. The maturity of the third party loan can be no less than 7 or 10 years, depending on whether the 504 loan maturity is 10 or 20 years. The CDC obtains the money it lends through the sale of a debenture (debt instrument) to investors in the private capital markets. This debenture is fully guaranteed by the SBA. The actual interest rate on a 504 loan is not known until the loan closes. However, this rate reflects the prevailing market rate at the time the debenture is sold and is generally more favorable than the rate on the first position loan from the third party lender. The principle benefits of obtaining a 504 loan for the small business applicant is that the 504 portion of the total financing is amortized at a fixed rate and, therefore, always constant, and the business can leverage SBA assistance when they need financing in excess of $1,000,000. With the maximum amount of a 504 loan equal to $750,000 and its portion being 40 percent of the total required financing, the complete financing can be as high as $1,875,000 to take full advantage of the program. However, this is not the limit on project financing because there is no requirement that SBA must finance 40 percent. The actual project could be for a larger amount with the 504 portion then becoming less than 40 percent. To find out more about the 504 program and whether it is right for you, contact the Certified Development Company serving your area. A listing of these lenders can be found in http://www.sba.gov/gopher/Local-Information/Certified-Development-Companies