In an article recently published in the Small Business Journal, Leonard Grunstein, a well-known New York City real estate expert, detailed how recent changes to a federal program can give small businesses a leg up. The Small Business Administration’s 504 Loan Program can help small businesses access loans for real estate mortgages.
The SBA 504 Loan Program addresses an important need in the market place and helps provide commercial real estate mortgage financing to small businesses at competitive rates.
In the paper, he argues that ownership of the real estate where the small business is located could help save a small business from being forced to close because of rising rents or unavailability of the space for re-lease. It can also be a wonderful outlet for diversification of investment by a successful entrepreneur. A retail business owner knows his neighborhood well and understands emerging trends in the local real estate market; this knowledge can be translated into a successful investment.
However, small businesses have a harder time getting approved for loans than larger, more established companies. The difficulties of getting a loan may discourage business owners from investing in real estate, limiting prospects for growth.
The 504 Program helps bridge this gap by letting small business owners take out loans for fixed assets such as real estate and machinery. The program provides for a government guaranty of the bonds of a Certified Development Corporation (a nonprofit entity dedicated to economic development), the proceeds of which are to be used to provide a second mortgage. A first mortgage loan is to be sourced from a bank. The balance is equity, to be provided by the borrower. To qualify for the loan, the business must show that it cannot obtain the financing without the aid of the SBA and demonstrate that it can pay back the loan.
In making the case for the program, Grunstein draws on his own experience helping his father renegotiate the lease of his grocery store, which he calls “no mean achievement.” He also describes a successful loan he made to a retail business early in his career, a loan that allowed the business to benefit from a boom in the local real estate market.