Recent changes to the SBA's 504 loan program guidelines are designed to give Third Party and Interim Lenders more flexibility and more certainty when participating in the 504 program.  Third Party and Interim Lenders participating in the 504 loan program should be aware of the recent revisions to the program guidelines set forth in Subpart C of SOP 50 10 5(G), which was recently released by the SBA Office of Capital Access, and became effective as of October 1, 2014.

The first revision is to the former "9 month rule" set forth in Chapter 2, Paragraph III.H.4.a) of the SOP.  In the past, expenditures for eligible project costs had to be incurred within nine months of the date of the SBA application to be included in the project, absent a waiver of this requirement by SBA.   Now, under SOP 50 10 5(G), all expenditures directly attributable to the project for any of the costs associated with: (i) land and necessary land improvements, (ii) building and building improvements, (iii) machinery and equipment that has a useful life of 10 years or more, (iv) furniture and fixtures if essential to and a minor part of the project, or (v) professional fees directly attributable and essential to the project (with the exception of attorney's fees incurred in closing the Interim and Third Party loans), which are incurred by the Borrower prior to the date of application are eligible project costs.  The only requirement for their inclusion is that all such expenditures (net of Borrower's contribution) must be reimbursed by the Interim Lender from the proceeds of the interim loan.

The next significant program enhancement was to include short term debt ("Bridge Financing") in the category of eligible project costs, so long as the purpose of such Bridge Financing was to provide funds to the Borrower until longer term financing could be obtained.  The Bridge Financing must be for a term of 3 years or less and may only have financed the costs associated with the items directly attributable to the project discussed in subsections (i) - (iv) in the paragraph above.

The next revision of note is to the collateral requirements for the program.  Prior to this change, a Third Party Lender could be considered to have an impermissible "preference" if it took collateral that was not also collateral for the Certified Development Company ("CDC") 504 loan.  Chapter 1, Paragraph IV.A.5. of SOP 50 10 5(G) has removed all references to preferences on this basis, and instead allows for Third Party Lenders to obtain liens on additional, non-project collateral ("Additional Collateral") subject to the following provisions: (a)  the Third Party Lender must liquidate or otherwise exhaust "all reasonable avenues of collection with respect to the Additional Collateral no later than the disposition of the Project Property"; and (b) the Third Party Lender must apply "any proceeds received from the Additional Collateral to the balance outstanding on the Third Party Loan prior to the application of proceeds from the disposition of the Project Property to the Third Party Loan."

The final significant revision for Third Party and Interim Lenders to be aware of is that CDCs must now submit evidence of completion of construction, if applicable, when they submit their loan packages to SBA District Counsel for approval.  While no specific documentation has been identified in SOP 50 10 5(G) to satisfy this requirement, the updated 504 Debenture Closing Checklist (SBA Form 2286), which was released in September 2014, appears to require, at a minimum: (i) a Certificate of Occupancy; (ii) evidence of compliance with seismic standards; and (iii) a Notice of Completion filed in the County records (if applicable).  Third Party Lenders and Interim Lenders who are financing construction or renovations as part of a 504 loan should review the construction requirements in the 504 SBA Authorization and work with the CDC to obtain all necessary construction documentation for submission to SBA District Counsel with the debenture funding package.

If you would like to review the full text of these revisions or the other revisions made to Subpart C, the following link will take you to the track changes version of SOP 50 10 5(G), click here. 

For more information on the recent revisions to the 504 Loan Program guidelines as set forth in SOP 50 10 5(G), please contact Janet at jdery@starfieldsmith.com or at 267-470-1189.