April/May 2015 Newsletter: 504 Rates

Over the last two months we’ve seen a bit of a fluctuation in rates.  The April rate was 4.60%, which was a nice drop from March’s 4.80% rate.  The May rate, though, jumped to 4.85%.  I’m guessing that despite the increase, those borrowers locking in a 20 year rate at 4.85% in May aren’t complaining.

The Eligible Project Cost Mystery

For most 504 deals, the project is comprised of land, building, construction/renovation and, perhaps, some equipment.  So, the borrower would inject its 10% equity, pay the closing costs, and we would close.  Simple and clean.

In the last couple of years more projects have included additional amounts for “Professional Fees” and “Other Expenses” as they are called in the 504 Loan Authorization.  Because the loans are approved before the project is started, often the types and amounts of the “professional fees” and “other expenses” included in the project costs are educated guesses, at best.  But what fees and expenses are actually eligible for inclusion in a 504 project?

Most of the “eligible project costs” are clear:

i. Land and Necessary Land Improvements

ii. Building and Building Improvements

iii. Machinery and Equipment

(a) All costs associated with the purchase, transportation, dismantling or installation of machinery and equipment;

(b) The machinery and equipment has to have a useful life of at least 10 years;

iv. Furniture and Fixtures – If essential to and a minor part of the Project;

However, the costs that create the greatest difficulty in determining if they are applicable and eligible are the following:

v. Professional Fees – Fees which are directly attributable and essential to the Project with the exception of attorney’s fees incurred in closing the Interim and Third Party Loans. Examples of eligible, project-related costs that may be included in this section are: title insurance, title searches and abstract costs, surveys and zoning matters.

vi. Expenditures for any of the costs listed in subparagraphs i through v, above, incurred by the Borrower (with its own funds or from a Short Term Debt) prior to the date of 504 application and which are directly attributable to the Project, provided such expenditures (net of Borrower’s contribution) are reimbursed by the Interim Lender;

vii. Short Term Debt (“Bridge Financing”) the purpose of which was to provide financing until longer term financing could be obtained for any of the costs listed in subparagraphs i through iv or in subparagraph vi above that are directly attributable to the Project, provided that the financing is for a term of 3 years or less;

viii. Interim financing – Repayment of interim financing including points, fees and interest;* and1

ix. Contingency Fund – May not exceed 10% of the Project construction costs.  Cost overruns/change orders, etc. must be verified and documented to be included in this category.

If you intend to include “Professional Fees” and “Other Expenses” in your project, it is highly recommended that you discuss their inclusion with your local CDC to confirm eligibility and appropriate amounts.  Once confirmed, inform  your borrower, in advance, which of their project costs are eligible (and may be included in the project), and which are ineligible and must be paid, in full, by the borrower.  The borrowers must also clearly document these expenditures as they are incurred in order to support their inclusion in the project.  This approach alerts the borrowers to the possibility that not all of the funds they invest into their project will be considered “eligible” for the 504 project. 

By addressing this issue up front and advising borrowers early in the process what costs are eligible and what aren’t, you avoid inevitable and uncomfortable conversations with your borrower down the road concerning the amount of money they have to put into their project. 


1. Note that the points and interest that are eligible here are only for the INTERIM LOAN – the loan to be paid off by the SBA 504 loan proceeds. Interest/loan fees/points on the bank’s permanent loan are not eligible project costs.

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  • About the Author

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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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