Jamie called the other day. She recently took over a CDC and we’ve been working with her, along with some mentoring thrown in. This time she was struggling with a new loan request from a prospect in a tough spot:

Jamie’s prospect, Bob, owns and runs Bob’s Bakery downtown. He has four employees. The building he’s renting is for sale for $1 million. He wants to buy it. If he doesn’t buy the building, he would have to move, which would cause some downtime for his business. And with the price of downtown real estate, it will be tough to find a place he can afford. So if he doesn’t buy his current place, it’s highly likely that he’ll have to close.

Generally, to qualify for 504 financing, a project must create or retain one (1) job for every $90,000 in the loan amount. If Bob can find a building, he would retain five (5) jobs, (four [4] employees + himself] which would qualify him for a $450,000 504 loan – five (5) jobs retained x $90,000. But the business is a bakery, and a bakery has a NAICS Code beginning with 311 which – Surprise! Surprise! – makes it a manufacturer. Manufacturing firms qualify for $140,000 for each job retained. So the bakery could qualify for $700,000 in 504 financing.

And even better: When it comes time to calculate the CDC’s portfolio Job Opportunity Average for inclusion in the CDC’s annual report, loans to small manufacturers are excluded from the calculation, as are loans to Eligible Public Policy Projects.

Are we done yet? Almost. Using job retention works only if the jobs would be lost without the financing. Jamie’s CDC has to reasonably show that jobs would be lost to the community if the project was not done. Saying so doesn’t necessarily make it so.[1]

Moving on to another prospect … Jamie thought all that was pretty cool, so she shared another 504 prospect: George and John own a residential realty that has one employee. The business already owns the real estate, but their mortgage with a balance of $800,000 outstanding has a balloon payment due soon. Even though the project meets all other criteria for a refi without expansion, Jamie didn’t think it had an economic development objective.

Another surprise: This project doesn’t have to meet the usual job creation or other economic development objectives.[2] For a Refinancing Project of a Qualified Debt that doesn’t involve an expansion, the maximum amount of the 504 is equal to the number of full-time equivalent employees multiplied by $90,000.[3] So while the refi is $800,000, 504 financing is limited to $270,000. However, the balance of the refi can be covered by the TPL or a borrower contribution. An important homework assignment for Jamie and her prospects!

Richard Jeffrey, Senior Associate
CDC/504 Program
richard@jrbrunoassoc.com
www.jrbrunoassoc.com

[1] SOP 50 10 7.1 p. 283

[2] SOP 50 10 7.1 p. 295

[3] Adjustments are made for part-time employees