I contacted the leading industry association for
these loan providers, NADCO to learn
more. This led to an interview with
Beth Solomon, President and
CEO of NADCO, and Hector
DaCosta, Senior Loan
New Jersey Business
What is a Real
What is a Real 504/CDC loan?
Real 504/CDC are loans that enable small business owners to
buy real-estate, such as office buildings, manufacturing plants, or
land for the use of their business.
of these loans is to encourage job creation and
economic development. As part of the loan process, you will need to
explain how the purchase of the real estate will lead to
The real estate being purchased by these loans must be at least
by the business taking out the loan.51% occupied
For example,a retail store could buy a two-story building in which
they used the main floor and basement, while renting out the top floor.
Low down payment of 10%
for an existing business buying real-estate that
could be used by multiple types of companies.
This compares to banks typically requiring a
25% down payment.
The CDC portion of the loan is a true 10 or
20 year loan with a very low interest rate.
The loan can include equipment to outfit the space,
building repairs and improvements, and the fees for
How does a Real
504/CDC loan work?
A Real 504/CDC loan is,
in fact, two loans.
One loan is being made by a CDC
(community development corporation) which is guaranteed by
And another loan is made by a banking institution.
The CDC Loan
This is a 10 or 20-year, fully amortizing, fixed-rate loan; meaning it works
the same way as a traditional mortgage loan works. The borrower pays
equal monthly payments for the life of the loan, at which point, the loan is
completely paid off.
The CDC Loan (Interest Rates)
The interest of the loan is very low. For a 10-year loan, it’s a 5-year
treasury rate plus 0.38%. For the 20-year loan, it’s a 10-year treasury
rate plus 0.48%. However, there are ongoing fees on top of the interest
payments that need to paid; the fees total around around 1.7%.
The Bank Loan
The interest rate offered on this loan
is determined by the bank making the
loan. The loan is generally 5 or 10
years long. In the case of loans that
are 10 years in length, the interest
rates generally reset after 5 years.
The Bank Loan
These loans don’t operate like your
traditional fixed-rate mortgage. At
the end of the 5 or 10 years, the
original amount borrowed (the
principal) will not be paid off in full.
Finding A Bank
When making a real-estate loan, banks focus on the LTV ratio. LTV
stands for loan (amount of the loan) to value (value of the real estate).
Banks generally would like the LTV ratio to be 75% or less.
Finding A Bank
When starting a search for lenders, it’s a good idea to find out from your
local CDC which banks are most active in making these types of loans.
Finding and Getting Approved by a CDC
There are a limited number of CDCs in any particular state that make
Real 504/CDC loans. For example, in New Jersey there are three active
CDC lenders. Nationwide, there are around 270 of these organizations.
to make you a
loan, a CDC cannot go to the SBA
to get a loan guaranteed.
However, you can contact a CDC
before you approach a bank. This
can be helpful, since the CDC is a
non-profit and can provide advice
about what questions to ask a
Without a banking
The goal of the CDC is
This is the main reason why a bank
might approve a loan and a CDC
The CDC must expect that one manufacturing job is created for every
$100,000 it lends or one new non-manufacturing position for every
$65,000 it lends. (Keep in mind, this is not the total amount lent,
just the CDC portion).
The purpose of the 504 / CDC loan is to provide financing for
projects with community economic benefits, which banks would
consider too risky to fund without the CDC participating.
Why a bank might approve you for a loan and
CDC might not? And The Reverse.
If a company can get a loan to buy the real
estate without the involvement of the CDC,
then the company would not
qualify for the CDC loan.
a loan that a CDC might be willing to submit to
the SBA for approval (for the loan to be
submitted, there needs to be bank a willing to
lend) might still be considered too risky by bank
On the other hand,
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