August 2014 Newsletter: 504 Rates

The August rate remained under 5.00% for the second straight month, coming in at 4.96%.  This follows a July rate of 4.952%.  This is the first time in over a year that the rates remained under 5.00% for back to back months.

The opportunity to lock your borrowers in at an outstanding rate for 20 years is better than it’s been for a while.  Now is the time to get them into the 504 Program!  They’ll appreciate you when they see rates rising and they’re locked in for 20 years!

The Tricky Business of Borrower Equity Injections

The Code of Federal Regulations requires that “The Borrower must contribute to the Project cash (or property acceptable to SBA obtained with the cash) or land (that is part of the Project Property), in an amount equal to the . . .” percentage of equity required for that project (usually 10%).  Seems pretty clear, right?

What about improvements paid for by a tenant now purchasing the property it occupies?  Are those previously paid for improvements eligible as equity?   Definitely maybe.  Clear as mud?  We’ve had a several deals recently with just this situation.  One, in which the tenant paid for the improvements during the lease, in cash, in a lump sum, SBA approved the tenant improvements as equity.  In two others, where the tenant was paying for its improvements monthly, pursuant to a separate loan for the improvements, the improvements were NOT permitted as equity.  SBA deemed this approach a refinance of that expense, thus not eligible as equity.

Note that the Borrower may also borrow its equity.  BUT, be aware that borrowed equity must be subordinate to SBA and may not be repaid faster than the SBA loan, without SBA’s prior written consent.  Will the lender of the equity agree to the long term and subordination of its equity loan?  Best to confirm these matters before getting too far into the process.

SBA is closely scrutinizing sources of borrower equity, as it should.  But, to help your borrowers get approval of a 504 loan as quickly as possible, understand that the more “creative” you or they try to be relative to the borrower equity requirement, the more scrutiny, and associated delay, you can expect.

My suggestion: Borrower injects its cash equity plus closing costs, at closing. This approach allows the closing statement to serve as evidence to the SBA of the borrower’s equity injection and, generally, helps the approval and closing run smoothly.

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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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