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Subordinated
Mortgages
Subordinated Mortgages
Subordinated mortgages are direct loans that are in a subordinated collateral
position to the primary lender.
Criteria
- Subordinated mortgages are made available for projects that meet quantifiable objectives
such as housing low-income people, creating jobs through business expansion, etc.
- Requirements vary, but may include criteria such as a limit on the subordinated mortgage
in proportion to the total project cost, minimum equity investment, rents that can be
charged to tenants, etc.
Uses
- Subordinated mortgages strengthen the collateral position of the first mortgage lender.
- Some subordinated mortgages are "near equity" and may be partially or
completely forgiven over time.
Structure
- Subordinated mortgages are often used with other enhancement programs.
- Revolving loan funds generally operate as subordinated mortgages.
- Subordinated mortgages often carry an interest rate subsidy.
SBA 504 CERTIFIED DEVELOPMENT COMPANY LOAN PROGRAM
U. S. Small Business Administration (SBA)
The SBA 504 program is a source of long term, subordinated mortgage funds that makes
loans with subsidized interest rates available for small business financing.
Eligibility
- Loans must be made through SBA Certified Development Corporations (CDCs).
- Borrowers must operate as for-profit businesses and not exceed $6 million in net worth
and not have average net income over $2 million for the previous two years. Equity must
equal at least 10 percent of the amount of financing. Loans must be for purchase of land,
buildings, machinery, equipment, and fixtures; construction and renovation of commercial
facilities; and project-related costs.
- At least one job must be created for every $35,000 in SBA assistance unless the project
will produce a high community impact.
Program
- The 504 program is a subordinated mortgage program for permanent financing for
fixed-asset purchases. It also makes below-market interest rates available to borrowers
through the blending of interest rates.
- For 100 percent SBA-backed debentures, the limit of the SBA portion on a project is
$750,000 to $1 million, or 40 percent of total project costs, whichever is less. The
minimum loan amount is $50,000.
- Loan maturity is generally 10 to 20 years.
- A typical financing structure consists of a loan from a private sector lender for 50
percent of project costs, a 40 percent debenture from the CDC that is 100 percent
guaranteed by the SBA, and 10 percent equity.
- Interest rates are based on five- and ten-year U. S. Treasury issues, plus an increment
above Treasury rate.
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