Turning a dream into a Cape Cod success story
by Small Business AdministrationSBA 504 Loan program helps purchase land or buildings. Frank and Patricia Facchetti decided to change careers, move to Cape Cod and pursue their love of boating by purchasing a marina. They researched the industry and spent almost a year looking for the right opportunity.
In 1998, they settled on Outermost Harbor Marine in Chatham, a sleepy operation at the time, where they saw the possibility of improving boat services and offering additional services to take advantage of the natural beauty of the marina’s location.
The Facchettis also researched financing options and, after meeting with Taunton-based Southeastern Massachusetts Economic Development Corp., decided to finance the real estate purchase with a first mortgage from Rockland Trust Co. and a second using the U.S. Small Business Administration’s 504 Loan Program.
With this financing package, the Facchettis were able to make a smaller down payment than required by conventional lenders and were able to roll the soft costs of the acquisition into the note.
Since the acquisition, Outermost Harbor has grown and prospered. Revenues have increased by 290 percent and the number of employees has grown from four to 19. In addition to operating the marina, the couple offers ferry service to South Beach and Monomoy Island, boat sales through Cataumet Boats and a retail store with boat clothing and accessories, snacks and souvenirs.
Small business owners like the Facchettis, who want to purchase or renovate commercial real estate to expand their operations, should look into SBA’s Certified Development Company/504 Loan Program. That’s a mouthful, but if you master it, you can access the same type of long-term, fixed-rate financing that large companies obtain through the bond markets.
The program also can provide financing for capital equipment.
The financing comes through SBA-licensed and certified development companies known as CDCs. The loans are used for:
fixed assets such as land or existing buildings;
new construction;
projects such as grading, street improvements, utilities and parking lots; and
long-term machinery and equipment with a useful life of at least 10 years.
But be aware that soft costs such as architectural and legal fees, environmental studies, appraisals, interest and fees on construction, and interim bank loans also can be rolled into the note.
The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing existing debt.
Typically, a 504 project includes a loan secured with a lien from a private-sector lender that covers up to 50 percent of the project cost, a fixed-rate loan that is secured with a junior lien from the CDC covering up to 40 percent of the cost and at least 10 percent equity from your own business.
Because of the lower down payment required and the ability to finance the soft costs, the small business will realize up-front cash savings of approximately $100,000 on a $1 million project.
Maturities of 10 and 20 years are available. Interest rates on 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. The rate on the 504 loan is fixed for the life of the loan and is set when the CDC sells the bond to fund the loan. The effective rate, which includes all fees, on 20-year bonds for the past six months have been between 6.5 percent and 7 percent during the year.
All SBA loan programs are reserved for small businesses, which cover the vast majority of companies on the Cape. Your company’s net worth must be under $7 million and net profits after taxes under $2.5 million. Any type of legitimate business is eligible for 504 financing, including manufacturing, wholesale, service, professional service or retail.
Consider the following advantages of the SBA 504 program versus conventional mortgage financing:
Low down payment. In most cases, the company is required to inject just 10 percent, which allows the business to preserve cash for working capital. Most banks will lend only 60 percent to 70 percent of the appraised value of the real estate, leaving the company to sink in 30 percent to 40 percent, plus the cost of renovations and soft costs. Most conventional commercial mortgages require equity positions of 30 percent or more.
Fixed rate on the SBA 504 portion. Small businesses don’t have to worry about the prime lending rate going up and can calculate the exact amount of their mortgage payments for 20 years.
Long term. 504 loans are for 10 or 20 years. Because the CDC is in second lien position, the bank or other lender doing the 50 percent first lien loan are willing to lend at a longer term. Longer terms reduce monthly payments.
Low interest rate. Even with all the fees and closing costs included in the rate, the 504 program offers a low rate for a subordinate mortgage loan, particularly for small business. The blended rate between the bank portion and the SBA’s 504 portion makes the project very affordable.
Where you can go for help
There are nine certified development companies in Massachusetts, including the SBA’s newest partner, Centerville-based Cape & Islands Community Development Inc.:
Bay Colony Development Corporation, Waltham, MA, (781) 891-3594
Cape & Islands Community Development Inc., Centerville, MA, (508) 362-5709
Dorchester Bay Neighborhood Loan Fund Inc., Dorchester, MA, (617) 825-4200
Granite State Development Corporation d/b/a New England Business Finance, Haverhill, MA, (978) 373-4756
New England Certified Development Corporation, Wakefield, MA, (781) 928-1100
Ocean State Business Development Authority, Providence, R.I., (401) 454-4560
South Eastern Economic Development Corporation, Taunton, MA, (508) 822-1020
South Shore Economic Development Corporation, Quincy, MA, (617) 479-7066
Worcester Business Development Corporation, Worcester, MA, (508) 755-5734
Source: U.S. Small Business Administration, Massachusetts office
Cape Business Newsletters
Keep up with the latest issues affecting your business and your life! To sign up for any of the Cape Business newsletters, click here.