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SBA 504 Q&A: Construction Loans

Jan 2020

Q: Does the Small Business Administration (SBA) have any specific requirements if, as a small business owner, I opt to purchase land and construct a building instead of buying an existing building? Additionally, if I am a licensed contractor, can I do the construction (or major renovation) myself?

A: SBA 504 loans that involve new construction or renovations do have additional due diligence and documentation requirements when compared to straight acquisition loans. Some of these additional requirements include:

• Evidence of compliance with the “National Earthquake Hazards Reduction Program Recommended Provisions for the Development of Seismic Regulations for New Buildings” (NEHRP). This is a non-negotiable federal requirement regardless of the state in which the building was constructed or that states particular building code requirements.
• If the loan will be used to finance new construction or the substantial renovation of an existing building, the appraisal must estimate what the market value will be at completion of construction. (“Substantial” means rehabilitation expenses of more than one-third of the purchase price or fair market value at the time of the application.) After construction is completed, the Certified Development Company (CDC; Florida First Capital) must obtain a statement from the appraiser, general contractor, project architect or construction management firm that the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based. If the CDC cannot obtain such a statement, then the CDC cannot close the loan without the SBA's Sacramento Loan Processing Center's (SLPC) prior written permission.
• Use of proceeds documentation is particularly important when it comes to construction or renovation loans. The CDC will need to collect all back up documentation for draws from the interim lender to include AIA draw sheets, signed settlement statements, invoices and evidence of payment.
• In the event the borrower is reimbursed, the CDC will require a copy of the canceled check from the borrower to the vendor as well.
• In relation to the occupancy requirement for new construction, a small business must occupy 60% of the rentable property and may lease long term up to 20% and temporarily lease an additional 20% with the intention of growing into the additional 20% within 3 years and all of the 20% within 10 years.
• Of note: for loans structured with an Eligible Passive Company (EPC), the EPC must leave 100% of the rentable property to the Operating Company (OC), who can then sublease as appropriate.
• “Do-it-yourself” construction and/or installation of machinery and equipment, or situations where the borrower acts as its own contractor, have proven to be generally unsatisfactory and can cause problems with lien waivers and mechanics liens, causing potential losses to the lender and/or SBA. “Do-it-yourself” construction, including renovations and/or installation of machinery and equipment, or situations where the borrower acts as its own contractor, may be permitted if the lender can justify and document in the loan file that:
• The borrower/contractor is experienced in the type of construction and has all appropriate licenses.
• The cost is the same as, or less than, what an unaffiliated contractor would charge as evidenced by 2 bids on the work (this must be provided at the time of application).
• The borrower/contractor will not earn a profit on the construction.

For more information about SBA 504 loans in Alabama, Florida or South Georgia, contact a Florida First Capital/First Capital Finance Loan Officer or email us at info@ffcfc.com. Phone: 850.681.3601 or toll-free at 800.504.LOAN.