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Making dough

SBA's 504 loan program helps make real estate, other significant investments possible for small-business owners looking to expand


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A 504 loan helped Ron Rexroth add equipment at his Fillo Factory. Here, he weighs some of his company's dough.
A 504 loan helped Ron Rexroth add equipment at his Fillo Factory. Here, he weighs some of his company's dough. - (AARON HOUSTON)

A Bergen County producer of fillo — the paper-thin sheets of dough in baklava and strudel — needed more space to keep up with sales growth of more than 25 percent. So Ron Rexroth, president of The Fillo Factory, bought a building in Northvale, installed new bakery equipment and put solar panels on the roof, and financed the project through the 504 loan program of the Small Business Administration.

The 504 is lesser known, more specialized and more complex than the SBA's much larger 7A program. It is geared to borrowers seeking long-term financing for fixed assets like buildings and equipment, and has features that appeal to both the business borrower and the commercial banks that partner with the SBA to assemble a 504 loan package.

For example, going the 504 route enabled Rexroth to put 15 percent of his own equity into the deal — far less than the 25 percent to 30 percent down payment he would have expected had he obtained a conventional commercial mortgage from a bank. Because of the low down payment, the 504 "was the only way we were ever going to be able to do such a big project," Rexroth said. The 504 includes a 20-year fixed-rate loan on the SBA's portion of the financing, "which just makes that monthly nut that much less — you pay longer, but you pay less per year."

Rexroth's 504 loan was arranged by the New Jersey Business Finance Corp., in Fort Lee, one of four certified development corporations in New Jersey that are authorized by the SBA to assemble 504 loan packages.

The SBA said the 504 loan program provides financing through the combined efforts of the SBA, commercial lenders, community development corporations and the businesses that obtain the financing. The commercial bank lends 50 percent of the project cost in return for a first mortgage, and the CDC provides 40 percent of the financing through an SBA-guaranteed debenture, which is pooled and sold on the financial market to investors. The business borrower is required to put up at least 10 percent equity into the deal. On the 40 percent CDC/SBA portion of the deal, the business gets a 20-year loan at a below-market interest rate that's locked in for the term of the loan, either 10 or 20 years.

Euclides Pagan is vice president and specialty finance officer at Chase Business Banking, which provided the bank portion of Fillo Factory's 504 loan. It was "a win-win," he said: "The folks at the Filo Factory were pleased, because they could combine their real estate with new and existing equipment, solar energy systems, and installations costs as collateral. As a result, we were able to approve them for more funds and complete their entire project."

Ron Rexroth, center, says a 504 loan was critical to the investments he made in Fillo Factory’s new building. He’s pictured with Euclides Pagan, left, and Gino DiSaverio, both with Chase Business Banking.

Ira Lutsky, president of the New Jersey Business Finance Corp., said 504 "is an economic development program," that typically enables a business to expand, to grow — and to hire more workers. On the 40 percent portion of the deal that comes from the CDC, "We are giving the borrower the ability to lock in for 20 years at relatively low rates. Right now, we are lending in the 4 percent range."

Chase is New Jersey's largest 504 lender, and was the largest in the nation in 2012. Bob Streb, vice president and sales manager for SBA lending in the Northeast, said the bank provides 50 percent of the financing on a 504 loan and gets a first lien.

"The 50 percent loan-to-value is a very attractive proposition for the bank. There is a very strong appetite at Chase for the 504 program," Streb said.

Since the 504 package consists of two loans — one from the bank and one from the CDC — both must go through their own application and underwriting process. To speed the paperwork, "we partner with the CDC every step of the way," Streb said.

Other New Jersey CDCs that provide 504 loans are the Regional Business Assistance Corp., in Mercerville; Cross Nations Pioneers, in Englewood; and the UCEDC, in Union.

Streb said some businesses see the 504 as a way to acquire real estate at prices that are below the highs reached before the 2008 financial crisis. Given the favorable conditions for both real estate values and interest rates, "It's kind of a perfect storm for people who are looking to acquire or expand their real estate holdings," he said.

That was Rexroth's experience. "We got a pretty good price on the building," he said. "After the financial meltdown in 2008, a lot of (real estate prices) started to come down to earth."

The Fillo Factory employs 160, and sales growth of 25 percent to 30 percent caused the company to outgrow the space in its old facility in Dumont. Now, Rexroth's workers "have more elbow room, and we are in a better position to go after better margin, more valued-added business," and will look to supply the food service industry — restaurants and caterers.

"We can never make enough" dough, he said. "Year after year, there are more and more people looking to buy it." The company sells dough under its own brand, and is a private-label supplier to other brands that sell the product under their names.

Bruce Rossi, first vice president of Provident Bank and head of the SBA lending division, is seeing an uptick in the 504 program. He expects the bank to do seven or eight 504 loans this year — about double previous years.

"There seems to be a greater demand for them," Rossi said. "People are looking to buy real estate while the values are down and the interest rates are down." He said businesses buy their office or factory because "they think they can buy the building at a comparatively inexpensive price compared to what they would have paid seven or eight years ago, and they are swapping rent payment for mortgage payments, which allows them to build equity."

And for the small-businesses owner, investing in their building can be a major part of their retirement planning, Rossi said. "They see buying that building as their 401(k), because it gives them the ability to then sell the building when they are ready to retire, or to rent it and then have a source of income from that building" during retirement.

Rossi said "One of the reasons (borrowers) like the 504 program is it allows them to buy a piece of real estate for only 10 percent down. Normally, a bank would want 20 or even 30 percent." Rossi said on a $1.7 million deal, a 10 percent down payment is $170,000, and 25 percent is $425,000 — "so there is a benefit to the borrower."

And buying the property shelters the business against commercial rent increases, he added. "You might have a great piece of property that you rent and you're doing well, and then the lease comes up, and they increase your rent by 10 or 15 percent. That puts pressure on your working capital and your profitability."

Dr. Narpat S. Jain got a 504 loan through the New Jersey Business Finance Corp. and Provident to move his practice, East Madison Dental, from Dumont to a new building in Tenafly.

"This is allowing us to grow," Jain said. The old office had five dentist chairs, while the new one has seven, with space for nine; the practice also has hired five additional staff. He said he likes the 504's fixed rate, since "I like to know what I'm getting into."

Jain said the move doubled his office space to 4,300 square feet, and unlike the old office, has parking available. "We have more room to work, and we're able to get more work done each day," he said.

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On Twitter: @bethfitzgerald8

Workers prepare dough at The Fillo Factory. The company got a 504 program loan to pay for an expansion; its owner only had to put 15 percent of his own equity into the deal, making it affordable.

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Beth Fitzgerald

Beth Fitzgerald

Beth Fitzgerald reports on health care, small business and higher education. She joined NJBIZ in 2008 after a 34-year career at the Star-Ledger and has been reporting on business in New Jersey since 1978. Her email is and she is @bethfitzgerald8 on Twitter.



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