If you plan to build, get your Stimulus money

[Alan Bussey]

If you are planning to build a new conveyor car wash, the following information may save you a significant amount of money:

On February 17th the American Recovery and Reinvestment Act, also known as the ?Economic Stimulus Package?, went into effect. Part of the Act significantly reduces the cost of getting a 2nd lien fixed rate loan under the SBA 504 program. Under this program a bank commonly makes a first lien loan that is 50% of the Total Project Cost and a Certified Development Company makes a second lien loan that is 30% of the Total Project Cost. As of the August fundings, the second lien loan has a fixed rate for the entire 20-year term that is only 5.4%. In July this second lien loan rate was the lowest that it has EVER been, just 5.2%. So, the rate for this loan is very low for a 20-year fixed rate business loan.

Assume that you are planning to build a new express exterior wash where the land, building, and equipment cost is $3,165,000. In this example, with a 20% down payment, a 50% first lien loan, and a 30% second lien loan, the first lien loan would be about $1,700,000, and the second lien loan about $989,000.

Prior to February 17th, the cost directly related to getting the SBA second lien fixed rate loan was 3.3% of the second lien loan, or $32,800, in the example above.

ARRA temporarily eliminates the two largest 504-related fees for getting a 504 second lien fixed rate loan.

Until about the end of October, when funding for this part of ARRA is projected to run out, the cost directly related to getting a SBA second lien 504 loan is just 0.9%, or $9,500, of the second lien portion in the example above. This is about a $23,300 LESS than what the cost was before ARRA.

(continued in next post)

Alan Bussey

 

[Alan Bussey]

Get your Stimulus Money, continued

Almost all of the costs for getting a SBA 504 second lien loan are financed in either the first or second lien loan. The temporary reduction in fees under ARRA reduces the loan payments in the example by $164 per month.

Since the 504 2nd lien (30%) loan has a below-market fixed rate of 5.4%, that rate when blended with a, say, 6% rate on the 1st lien (50%) bank loan drives the overall average rate down to just 5.7%.

With a 504 loan the investor?s down payment is almost always no more than 20%, where with a conventional bank loan the down payment is often 30% or more. That is a huge $300,000+ difference in the necessary investment (?Equity injection?, or ?down payment?) made by you.

Considering that the bank needs to make a loan that is only 50% of the Total Project Cost, using the 504 loan structure provides the (risk reduction) incentive necessary to the bank to make the loan for new your car wash.

The American Recovery and Reinvestment Act reduces your cost of getting a 504 loan. But if you are planning to go the 504 route and want to pay the lowest cost for that loan, you?ll need to get your 504 loan application submitted very very soon, before the budget for the temporary cost reduction runs out in October. Funds are allocated to applicants based upon whether an application has been submitted to SBA, not based upon whether the loan closes, before the budgeted funds run out.

Alan Bussey

 

[Waxman]

That's super information.

However, having just closed a 504 Loan myself this Summer, I'll add this: there is a very slim chance that anyone who is not already well-along in the lending process and approved for a 504 loan will be in a position to take advantage of this program before October.

 

[Alan Bussey]

Waxman -

The application for the 504 second lien loan just has to be submitted by the Certified Development Corporation (CDC)to SBA before the money runs out some time in October, perhaps November. That's all. Submittal of the application "reserves" the fee waivers, not approval. The order is: 1. bank approval, 2. bank submits 504 application to the CDC, and then 3. CDC submits application to SBA. (Using a CDC that has expedited processing authority will get approval from SBA within three business days.) The time-consuming part of the process is collection of all of the project quotes and estimates, preparation of the cash flow projections, and preparation of a business plan (if the applicant is new to the industry). Once the bank has approved their 1st lien loan the correct forms have to be completed by the CDC for submission to SBA for the second lien loan. Normally the CDC's and SBA work out a "hurry-up" procedure to get everybody "in" that wants in when they have program deadlines like this. But, if someone wants to take advantage of the fee waivers, now is the time to get moving.

Alan Bussey

 

[Waxman]

I see your point.

I guess I was referring to the interest rate on the 504, which sets at the time of closing.

For example, when I started my paperwork rates were mid 7's. At closing they were high 4's. I was so happy I almost cried. Okay, I did cry but only a little 'man cry', not a full, blubbering, over-wrought crying jag.

 

[Alan Bussey]

Waxman -

Well, I understand your point as well. I wasn't going to touch on the exact timing of the 504 loan closing because the key to getting the fee waiver is getting the application submitted very soon, before the appropriation runs out. Closing into the permanent second lien fixed rate loan can take place a year or so later. You are correct that the fixed rate right now is very low and is only set shortly before closing from the construction loan into the second lien permanent loan. With interest rates likely to head north, the earlier that someone gets their car wash completed and open for business, the lower that the second lien loan fixed rate is likely to be.

Alan Bussey