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SBA 504 Loan Program Rule Changes Take Effect

Apr 2014

New rules aimed at streamlining existing regulations for the Small Business Administration (SBA) 504 Loan Program went into effect on April 21, 2014.

Personal Resources Test Eliminated

The SBA no longer requires that the personal resources of owners be used to reduce the total financing package. Lenders should, however, continue to follow prudent lending practices and may require that assets either be injected or pledged as collateral for a particular loan if deemed prudent.

Elimination of the personal resources test does not change the rule on Credit Not Available Elsewhere. That regulation still applies to all 504 Loans.

9-Month Rule Eliminated

The SBA has revised its rule which limits project expenses eligible for 504 Loan Program financing to those incurred within 9 months prior to receipt by the SBA of a complete loan application.

This change will permit financing of expenses toward a project regardless of when the cost was incurred, so long as they are directly attributable to the project.

The SBA will continue to determine whether expenses incurred prior to application were in fact incurred for a 504 Project. If expenses were financed as part of the project, elimination of the 9-month rule does not change the SBA's policy that short-term debt ("bridge financing") must be for a term of 3 years or less and directly attributable to the Project.

(Also see SBA504 Q&A: Soft Costs and Elimination of the 9-Month Rule)

Third Party Lender Preference Eliminated

The SBA has revised its regulation in regard to Preference and the Third Party Lender loans (first mortgage lenders on 504 projects).

A Preference is defined as "any arrangement giving a Lender or a CDC (Certified Development Company) a preferred position compared to (the) SBA relating to the making, servicing or liquidation of a business loan with respect to such things as repayment, collateral, guarantees, control, maintenance of a compensating balance, purchase of a Certificate of deposit or acceptance of a separate or companion loan, without SBA's consent."

The section stating that no "Third Party Lender shall establish a preference" has been eliminated.

However, language has been amended regarding liquidation of additional liens or other collateral (not project property) in that the Third Party Lender, in the event of liquidation, must first apply the proceeds from the sale of such additional collateral to the balance on the Third Party Lender's loan, unless otherwise approved in writing by the SBA.

If you have any questions or would like more information about the rule changes, click here to contact a Florida First Capital Loan Officer or email us at info@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.