October 2014 Newsletter: 504 Rates

Interest rates for loans funding in October, 2014, fell to 4.82% which is the lowest the rates have been since June of 2013. Looking ahead, with rising rates on the horizon, lenders, commercial real estate brokers, accountants and others who counsel business owners looking to buy, build or renovate a building, should be sure to advise their clients about the benefits of the 504 Program. A well-informed financing decision by eligible borrowers can only be made after all options are identified and explored.

Practice Tip: Establishing Borrower Equity and Proper Fund Disbursement

The office of Credit and Risk Management has identified two primary areas of loss in 504 loans:

  1. Failure to verify construction completion and right of occupancy; and
  2. Failure to verify equity injections and correct use of loan proceeds.

SBA will accept a signed closing statement as evidence of equity. Collecting equity at closing is far simpler to the alternative:

If borrower equity is NOT collected at closing, the Lender/Bank must procure and produce to the local CDC a combination of the following to verify borrower’s equity:

  1. Copies of receipts, invoices or other supporting documentation marked “paid” by the seller or vendor; or
  2. Evidence of electronic funds transfer to a vendor together with a copy of the invoice being paid;
  3. Joint payee checks

For a construction/renovation project, SBA will require the Lender/Bank to produce the same evidence listed, above, in order to verify that the loan proceeds were used and disbursed consistent with the SBA loan authorization.

Knowing, in advance, what you will have to provide your local CDC to confirm equity and the proper disbursement of funds will allow you to set borrower expectations up front and set out, clearly, what you’ll need to satisfy SBA to avoid delays in closing and funding.

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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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