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Recent Changes to 504 Rate Program

February 13, 2019

504 rates have continued to decline over the last several months.  From a recent high in November of 5.591%, rates for the 20-year debentures have steadily decreased to 4.926% in December, 4.758% in January 2019 and 4.646% in February.

Rates for the 25 year debentures have followed suit with the December rate coming in at 4.990%, January 2019 at 4.881% and February at 4.771%. Here are recent changes to the 504 rate program.

Limited or Special Purpose Properties:

The SBA has reduced the list of Limited or Special Purpose Properties to 6 property types.

The current list includes:

  • Car wash businesses
  • gas stations
  • hotels, motels, and other lodging facilities.
  • Hospitals, nursing homes, and assisted living centers
  • Marinas
  • Farms, including livestock and dairy facilities

*Per SBA, this list is not intended to be “all-inclusive”, but to provide a general guide to borrowers of the types of properties which will result in an additional 5% equity injections

Passive Businesses:

SBA has clarified that businesses, such as nail salons, which rent out space to independent businesses/independent contractors, which, in turn, provide personal services, are now considered passive businesses, and not eligible for a 504 loan. 

Likewise, if a business enters into a management agreement with a third-party giving sole discretion to manage the business, that business will now be considered passive and not eligible, even if the business itself would, otherwise, have been eligible for a 504 loan.

Personal Guarantees:

If the combined ownership in the real estate holding company (EPC) or the small business (OC) equals or exceeds 20%, both spouses must sign a guarantee. 

SBA has also modified the personal guarantor provisions to permit the CDC to require a personal guarantee from anyone with significant influence over the operation or management of the business.  This is a discretionary decision made by your local CDC. 

Refinance Without Expansion:

Keep in mind that existing financing secured by eligible assets, e.g. real estate, may be financed into a 504 Loan providing protection against interest rate risk and allowing, in some circumstances, cash out to cover certain business expenses.  

About the Author

Thomas M. Woebkenberg

Thomas M. Woebkenberg

Tom Woebkenberg practices in the firm’s Real Estate Practice Area

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