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SBA 504 Q&A: 95% Collateral Requirement under New SOP 50 10 5(J)

Feb 2018

Q: Upon receipt of an appraisal for a Small Business Administration (SBA) 504 loan that does not meet the requirements within the authorization, how can the Certified Development Company (CDC) overcome the collateral shortfall?

A: Collateral coverage is calculated based on total project costs, not on loan amounts.

From the new SOP 50 10 5(J): If the appraisal comes in at less than 95% of the estimated value, the debenture must be reduced or, if available, the CDC must secure additional collateral or additional investment from the borrower and/or guarantors that will be added to the required borrower's contribution and will be sufficient to address the gap in value. If additional collateral or additional investment is not available, but the applicant demonstrates strong, consistent cash flow sufficient to support the debt, then the SBA can approve the appraisal and the CDC may close the loan.

Q: How do you determine the loan adjustments when the project appraisal comes in at less than 95% of the estimated value?

A: Suppose the project costs are as follows:

SBA: $400,000 (40%)

Bank: $500,000 (50%)

Equity: $100,000 (10%)

Total: $1,000,000

Appraised Value: $940,000 (94% of total project cost, or estimated value)

The project shortfall equates to the estimated value (total project cost) multiplied by 95%, less the appraised value.

Shortfall: ($1,000,000 @ 95%) - $940,000 = $10,000

Since the appraisal came in at less than 95% of the estimated value, the debenture must be reduced.

SBA: $390,000 (39%)

Bank: $500,000 (50%)

Equity: $110,000 (11%) (10% equity requirement + shortfall)

Total: $1,000,000

OR, the CDC must secure additional collateral from the borrowers or guarantors that will be added to the required borrower contribution that will be sufficient to address the gap in value.

SBA: $400,000 (40%)

Bank $500,000 (50%)

Equity: $100,000 (10%)

Total: $1,000,000

Additional Collateral: $10,000 (example: lien on personal residence)

IF additional collateral or additional investment is not available, but the applicant demonstrates strong, consistent cash flow sufficient to support the debt, then the SBA can approve the appraisal and the CDC may close the loan.

If you have a question you'd like our SBA 504 loan experts to answer, email us at info@ffcfc.com or call 850.681.3601 or toll-free at 888.320.5504.