504 LOANS FINANCE
STRUCTURING THE BANK’S LOAN
The Lender’s Role in the 504
With the 504 Loan Program, lenders will generally process their loan as they would with any other
- Provide the interim funding until the deed is recorded
- The bank’s term of loan (commitment) must be ½ of Growth Corp’s bond, but no less than seven years (equipment) or ten years (real estate).
o Usually a 10-year commitment on real estate
o Likely 5-year adjustment (but can be floating or fixed)
o Amortization is usually 20-25 years
- Bank gets first lien on all project assets
- Bank’s loan cannot be cross collateralized with any debts
- Advance is based on the land, building and miscellaneous costs
o Appraisal usually comes in at or around 90% of land and building cost.
- For changes of ownership, project costs need to be equal or less than the appraised value.
- Bank is asked to provide copies of its own loan documents
Structuring the Bank’s Loan in a 504…One Loan or Two?
Assuming the borrower has already applied for a 504 loan, the main factor to consider is whether the project is:
- an acquisition with very little build-out requirements; or,
- a construction project that will take 8-15 months (or more) to complete
Now, here are SBA’s preferences and why:
- If the project is a straight acquisition (very few build-out requirements), then SBA’s preference is to do two loans. The reason being is because with two mortgages, the title work will clearly show the loan amount that is ahead of the SBA 504 portion and SBA can then easily determine that the amount they are sending to the bank at closing is enough to pay off the interim loan.
- If the project involves renovation/construction requiring at least 8-15 months to complete, then SBA’s preference is to do one loan. The reason being is that there are going to be different provisions. So, the amount of a construction loan should be the sum of the term loan and the interim loan. Then, at closing, the bank should do one term loan for their portion and use the proceeds to pay down the construction loan. SBA can then look at the large construction loan, clearly see what the bank’s term loan has paid down, and verify the difference remaining matches the amount they are sending in 504 funds.