April 2014 Newsletter: 504 Rates

Interest rates for April 2014 dropped 10 basis points in April to 5.19%. This is the lowest 20 year debenture rate since June, 2013.

“Final Rule” Approved – Improves 504 and 7a

Effective April 21, 2014, several changes to the 504 and 7a Loan Programs will take effect. I’ve summarized a couple of the bigger changes below:

1. Elimination of the “Personal Resource Test”

This change eliminates the previous requirement that if the personal resources of an owner of more than 20% equity in the small business applicant exceeded specific levels (set out in the program regulations), those owners were required to inject their personal resources into the deal in order to reduce the SBA-funded portion of the financing package.

The goal here appears to be to eliminate barriers to successful business owners applying to participate in the SBA’s Loan Programs, thus expanding the pool of applicants/users of the programs.

2. Elimination of the “9 Month Rule”

This change eliminates the requirement that for expenses to be eligible for a 504 Project, they had to have been incurred within 9 months prior to the SBA’s receipt of a completed loan application. Now, as long as an expense is directly attributable to the Project, they are eligible regardless of when incurred.

3. Liquidation of Additional Collateral Required

If a Third-Party Lender (Bank) requires collateral in addition to the Project property, in the event of default, the additional collateral must be liquidated no later than the Project Property, and the proceeds from the liquidation of the additional collateral applied to the balance due on the Third-Party Lender’s loan. This “pay down” must occur prior to application of any proceeds from the liquidation of the Project property to the Third-Party Lender loan. Essentially, if you take extra collateral, you have to sell that first, reduce your loan balance, and then look to the Project property for the balance. This addresses the former prohibition against “preferences” by Third-Party Lenders.

If I can help in any way, please don’t hesitate to contact me.

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    Thomas M. Woebkenberg

    Tom Woebkenberg practices in the firm’s Real Estate Practice Area. His practice consists primarily of commercial real estate transactions. He represents lenders of all sizes throughout Ohio and Northern Kentucky.

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