Explaining the SBA 504 Green Loan Program - Professional Carwashing & Detailing

Explaining the SBA 504 Green Loan Program

The secret to financing multiple wash projects with low-rate SBA loans.

Carwash investors looking to grow and expand their operations through acquisition, conversion or ground-up construction can qualify for additional SBA financing by going green. Carwash owners can benefit the environment and the bottom line with fixed interest rate financing under the SBA’s 504 Green Loan Program. Under the program, experienced carwash operators can finance up to 85%. New investors can finance up to 80%. Loan terms range from 10 years for equipment to 25 years for new construction and acquisitions.

Growing from 1 to 10

Instead of being limited to financing one or two locations under the standard SBA programs, entrepreneurs can finance 10 or more washes with the SBA 504 Green Program. Unlike the traditional SBA 7(a) and 504 loan programs that cap your borrowing limit at $5 million, the latest version of the SBA 504 Green Loan Program increases the SBA guaranty limit to $16.5 million. This change increases the maximum borrowing capacity to over $40 million.

But, how does an increase to $16.5 million in guaranty equal $40 million in borrowing?

The key to why an individual can borrow more is understanding the SBA 504 loan structure. A 504 loan is actually a combination of two loans. The 504 loan “package” has a conventional bank loan in first position and an SBA loan in second lien position. The conventional loan represents 50% of the total project costs. The SBA loan represents 30% for new investors or 35% for experienced operators. The reason you can borrow more is because SBA guaranty only counts against the SBA 504 loan portion and does not count against the conventional loan portion. 

Long-term fixed rates

As previously mentioned, the SBA 504 Green Program consists of two loans. The conventional loan is amortized over 20 or 25 years and typically fixed for three or five years. The real benefit is the rate on the SBA portion. The SBA 504 loan, which is underwritten by a Certified Development Company (CDC) is fixed for the entire term of the loan, which is normally 20 or 25 years. Not only is it fixed, but it’s fixed at a below market rate. As of February 2020, the 25-year rate was fixed at 3.46%.

How to quality for the Green 504

The general qualifications are that businesses must:

  • Be for-profit
  • Be 51% or more owner-occupied 
  • Have a tangible net worth of less than $15 million 
  • Have a net income of less than $5 million. 

For new construction, your business must occupy at least 60% upon completion and plan to occupy 80% within 10 years. Start-up carwashes are eligible.

New investors going green

A common way for new investors to qualify for the green certification is to produce 15% of their own energy. Solar panels on your rooftop or on top of vacuum canopies are the most obvious solution.

You can produce the energy in multiple ways, using a combination of common sources of renewable energy, such as solar, wind and thermal. The cost associated with the installation can be included in the loan amount. The most frequent method used to generate renewable energy is by adding solar panels. Currently, this equates to about a $150,000 investment in solar. 

As previously mentioned, if you do not own a building currently and have no baseline for energy consumption, the SBA requires that you produce enough of your own energy to account for 15% of your total consumption, since you do not have an existing building to benchmark against. 

Existing operators converting to green

Existing operators can acquire or construct a building that uses 10% less energy than what you are currently using. It is important to remember that the 10% reduction is in energy consumption, not dollars saved on lower utility bills. To verify reduction in energy consumption and/or production of renewable energy, borrowers must have an energy audit completed by a qualified energy consultant.

If you currently own a wash and are looking to convert or remodel, you can also retrofit your existing facility and include technologies that reduce your current consumption by 10% (variable frequency drives, LED lighting, solar, etc.).

Drawbacks of SBA 504 loans

There are several disadvantages to this type of loan, including the following: 

  • Separate construction loan: Unlike the SBA 7(a) loan program, you will need a separate construction loan for new construction projects. The 504 loan starts after construction is complete. It’s not an issue if your lender offers construction lending. If the financial institution does not offer construction lending, you will have to incur the additional expense and additional time of securing a separate construction loan.
  • Timing: The SBA 504 loan approval process takes longer than the conventional or SBA 7(a) approval process. This is because you have potentially three different entities (conventional lender, SBA/CDC and construction lender) underwriting the transaction. The 504 loan process can take an additional 30 days or longer.
  • Prepayment/assumption: The SBA 504 portion of the loan has a 10-year prepayment penalty. If you are looking to flip your wash, the 504 prepayment penalty may not be ideal for your situation. With that being said, SBA 504 loans are assumable with lender and SBA/CDC approval.
  • Experience counts: It is important to find a lender experienced in 504 green loans. Very few lenders offer 504 green loans for carwashes. Limited funding sources can cause unwanted delays in your quest for a carwash loan. 

Benefits of SBA 504 Green loans

However, there are also several benefits to these loans as well as going green, including these: 

  • Greater capacity: The green certification allows for multiple SBA loans for the same applicant.
  • Bigger loans: The green 504 is a second mortgage that can be as much as $5.5 million per project. Therefore, the combined loans (conventional first and SBA second) for one project can exceed $13.3 million.
  • Removes restrictions: The usual SBA 504 jobs creation/jobs retention requirement does not apply when you use the SBA 504 green loan. This is very helpful for businesses with few employees, like express exterior washes.
  • Refinance available: The 504 loan can be used for refinancing higher rate/shorter term debt.
  • Mid-size businesses are eligible: Larger businesses now qualify for the 504 green loan. The tangible net worth maximum was increased to $15 million. The net income cap was increased to $5 million.
  • Includes soft costs: Associated fees and soft costs can be financed in the loan (architectural and engineering fees, appraisals, closing costs, etc.). However, working capital and inventory are excluded. So, plan on having extra cash to cover your working capital and inventory needs.
  • Attract clients: Going green can enhance your brand image. According to a 2014 Nielsen study, 42% of North American respondents say they are willing to pay more for products and services provided by companies that are committed to positive social and environmental impact.1 Four out of 10 said that they have purchased a green product within the last six months.
  • Employee retention: Green can help with employee retention. Today, wellbeing is an important workplace value. The new generation of employees cares about a company’s investment in sustainability. Beyond financial benefits, many employers want to support the cognitive and emotional wellbeing of their employees. 
  • Tax benefits: You can receive tax incentives. The federal government and many state and local utilities have tax incentive plans for the installation of green renewable energy systems and some significant first-year rebates that can help offset some of the renewable energy installation costs. The current federal tax credit is 30% as of 2019.

North Carolina State University has compiled a comprehensive “Database of State Incentives for Renewables and Efficiency” that details federal and local incentives by state for all types of renewable projects. You can access the rebate and incentive database at www.dsireusa.org

Grow with green

In conclusion, with the rapid expansion in the carwash marketplace and limited conventional loan options, the SBA 504 Green Loan Program may be a way for you to start or grow your carwash business. The high loan-to-value, below-market fixed rates and long loan terms make the program attractive for just about anyone in the carwash industry.  

For additional information on the SBA 504 Green Loan Program, feel free to contact Michael Ford, managing director for Coast Commercial Credit™, at 1-800-400-0365 or [email protected].



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