The U.S. SBA 504 loan program ("504 Program") provides a unique loan product that offer lenders an opportunity to finance fixed assets with a low loan-to-value ratio.  The typical structure for a 504 Program loan is that a lender initially finances up to 90% of a project with two loans, referred to as the permanent and bridge loans, with the borrower contributing the remaining 10% of the project.  After completion of the project (i.e., purchase of real estate, completion of construction or installation of equipment), the bridge loan is then refinanced by a certified development company ("CDC").  The CDC loan, or "504 Loan", will be secured by a second lien position on the collateral securing the permanent loan.  When the CDC funds the 504 Loan, and takes out the bridge loan, the lender's permanent loan is typically in first lien position on all collateral, with approximately a 50% loan-to-value ratio.  However, the requirements for a 504 Loan funding can be complicated. Understanding the mechanics of how and when a 504 Loan funds can help borrowers and lenders set realistic expectations and deadlines.

The time between closing and funding a 504 Loan is typically between 4 to 8 weeks. At the time of a 504 Loan closing, the CDC will issue a debenture in the amount of the 504 Loan. A debenture is an unsecured debt instrument. The debentures issued by CDCs are guaranteed by the SBA, which makes them marketable. Each month, debentures issued by CDCs nationwide are pooled and sold to investors. The sale of the debentures is the source of the 504 Loan proceeds.

After closing a 504 Loan, the CDC, or its counsel, submits the CDC Loan documents to SBA District Counsel, who must review and approve the 504 Loan before the debenture can be submitted for sale to the secondary market. Deadlines for the submission to SBA District Counsel are typically mid-month in the month prior to funding, however, each SBA district is different, so it is important to obtain all deadlines from the SBA District Office to which a 504 Loan is being submitted. There is typically a period of approximately 1-2 weeks during which the SBA District Counsel will review the 504 Loan submission and notify the CDC as to whether any changes are necessary before the debenture can be submitted to for funding. The deadline for the SBA District Counsel to submit any approved debentures for funding is approximately three (3) weeks prior to the debenture sale.

Once approved, 504 Loans are sent to SBA's central servicing agent, Colson Financial Services. The CDC has one (1) week, while the debentures are processed by Colson, to pull any 504 Loan from the debenture pool should it need to be due to any material changes. The price of the debenture pool is then negotiated by underwriters and investors. The price that gets set for the debenture pool will ultimately determine how the interest rate of the 504 Loan will be calculated. Once the price and the interest rate are set, the debenture pool is sold and the proceeds of the sale are sent to Colson. Colson will then disburse the debenture sale proceeds directly to the lenders whose bridge loans are being paid off with the 504 Loan proceeds. This funding occurs on the Wednesday after the second Sunday of each month. Twenty (20) year debentures, which are used to finance real estate, are sold on a monthly basis. Ten (10) year debentures, which are used to finance machinery and equipment, are only sold in January, March, May, July, September and November.

Since there are many parties involved, who are each faced with their own deadlines, it is important to be aware of the 504 Program funding process and keep lines of communication open among the borrower, lender and CDC in order for each party to meet its deadline and ensure that the 504 Loan funds in a timely manner.

For questions about 504 Loans and funding procedure, contact Jessica Conn at JConn@StarfieldSmith.com or at (215) 542-7070. 

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