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Overview of Important SOP Revisions Affecting 504 Lending

Sep 2008

With the Small Business Administration's (SBA) revised SOP 50 10(5) now in place, it is important for lenders to familiarize themselves with its changes and how it impacts the 504 program.

The revised rules apply to all new applications on or after Aug. 1, 2008, as well as to all loans approved prior to this date that do not have an SBA authorization number.

While not all inclusive, the following are highlights of some of the more important changes affecting 504 lending.

• If a borrower has been in operation for less than two years, it is considered a start up and an additional 5% equity injection is required. This is a statutory requisite of the 504 program. There is no provision for “experience” to qualify a new business as “existing.” The SBA has included a change in ownership in the meaning of a new business where the higher injection applies. For an applicant to maintain it is not a new business, it needs to prove through common ownership, clientele and business type that it should be considered an expansion of its own present existing business concern (same ownership). In this case, the existing business concern must be either an obligor or a guarantor on the 504 loan - in effect, then, the applicant for the 504 loan is the group including the existing affiliate(s). Otherwise, the only applicant for the 504 loan is the new business, and the additional 5% equity injection for new businesses is mandatory. A new business entity has no standing to maintain that it is an expansion of a business which is not a party to the 504 application.
• A borrower's tangible net worth cannot exceed $8.5 million and their two-year average after tax annual profits cannot exceed $3 million. The previous size limits were $7.5 million in net worth and $2.5 million in average earnings.
• Short term “bridge financing” on project land (no building on the land) is now for a term of three years or less (previously was five years).
• Disbursement of funds must occur within 48 months from the date of approval. There will be no extensions.
• If a franchise agreement is not listed on the SBA's franchise registry (www.franchiseregistry.com), the CDC must request a review be made of the agreement and all related documents. If an agreement was previously determined to be unacceptable and the reason for that finding cannot be resolved, the applicant is deemed ineligible.
• An appraisal must be requested by and prepared for the lender on the loan. The SBA requires a real estate appraisal if the estimated value of the project property is: greater than $250,000; or $250,000 or less, if such appraisal is necessary for appropriate evaluation of creditworthiness.
• Appraisals for new construction or substantial renovation of an existing building must estimate value as completed. When completed, the lender must obtain certification of completion from the appraiser according to the plans and specs.
• If the valuation of fixed assets is greater than their depreciated value, an independent appraisal must be obtained to support the higher valuation.
• If an applicant answers ‘yes' to question 7 on Form 912 (about being on parole or probation), the application is ineligible. A background check and character determination is required if an applicant answers ‘yes' to questions 8 or 9 unless the charge was a single misdemeanor that was later dropped without prosecution.
• When combined spousal ownership is 20% or more with each spouse owning 5% or more, both spouses must give an unlimited guarantee.
• If no individual owns at least 20%, at least one owner must sign an unlimited guarantee.
• “Do-it-yourself” construction or renovations are allowed when the borrower is experienced and licensed and will earn no profit on the construction, and the cost is the same or less than an outside contractor as evidenced by two bids.
• Environmental investigation is required for all commercial property collateral, even secondary collateral. The type and depth of the report depends upon the risk of contamination and NAICS codes for current and prior uses of the property. If the NAICS code matches the list of environmentally sensitive industries, the investigation starts with a Phase I.
• Extensive environmental work is now required for gas stations, including land and also equipment functionality. If site contamination is found, the lender must decline the loan.
• Special use facilities like day care and residential care facilities, need lead risk assessment.

Borrowers and lenders can trust FFCFC to guide them through the new SOP and offer the best service and 504 loan expertise in Florida.

For more information on FFCFC and its 504 loan program, visit www.ffcfc.com, email us at insider@ffcfc.com or call 888.320.5504.