{meta_title}

SBA 504 Q&A: Loan Subordinations

Jul 2013

Q1: Does a Small Business Administration (SBA) 504 loan borrower have to remain with the originating first mortgage holder financial institution for the life of the loan?

A1: No; the 504 loan is a long-term product that can be in place for up to 20 years and in the course of 20 years, many things can change. Banks' appetites for commercial real estate loans can change, borrower/bank relationships can changes and better terms and conditions may become available as a market changes.

Q2: There is a new lending institution that would like to take over the first position loan; how is this accomplished?

A2: There are several ways a new lender could take over the first position on a 504 loan. The first and simplest is that they buy the existing lender's loan documents and then prepare a note modification for the change in terms being offered to the 504 client. This is dependent upon the individual lender's loan documents and if they are assignable for this type of transaction.

If the documents are not assignable, or the new lender wants to utilize their own loan documents for the transaction, the borrower and the new lender need to approach the Certified Development Company (CDC) to have a servicing action called a loan subordination processed. This allows the new lender to move into the first position on the loan at the time of their final closing/funding for the project.

A subordination action is fairly common, but also reasonably complex. To obtain a checklist of required items, the borrower and/or the new lender are encouraged to contact the loan administration area of the CDC and discuss the items required for the CDC to prepare this action for SBA review and approval.

Q3: Can the new lender include additional funds on their new loan?

A3: Yes, in certain circumstances. Currently, the Standard Operating Procedure (SOP) allows for the inclusion of costs incidental to the new loan closing to be included in the new first mortgage loan amount. If there are additional funds to be advanced, let's say for specific improvements to the project property, these funds may also be included, but similarly to a new 504, the funds can only be advanced by the new lender in a third position (until such time as the improvements are complete) with the subordination happening when the “construction phase” is over. The CDC will obtain the approval prior to the funds being advanced; it is only the final subordination that is delayed.

Q4: Can the funds be used for working capital or cash out if the appraised value is sufficient to cover this?

A4: No, at the present time, the subordination to additional funds to be used for working capital is expressly prohibited by an SBA policy notice issued several years ago. This item has been the subject of much discussion in the industry and may be changing in the future, but for now it is not allowed.

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 888.320.5504.