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SBA 504 Q&A: The Third Party Lender and the 504 Closing Process

Mar 2014

Q: How does the Small Business Administration (SBA) define a Third Party Lender?

A: The SBA's Standard Operating Procedure (SOP) indicates that a Third Party Lender is usually a financial institution that provides the Third Party Loan and typically has a first lien on the project collateral.

Q: What is the definition of a Third Party Loan?

A: A Third Party Loan is a loan from a commercial or private lender, investor, or Federal (non-SBA), State or local government source that is part of the project financing. It's important to note that the Third Party Lender typically has a 1st lien on the Project Property, and the SBA cannot guarantee these loans.

Q: In general, what role does the Third Party Lender play in the closing process and what are the requirements for the Lender when closing and funding a 504 loan debenture?

A: It is paramount that the Third Party Lender and the Certified Development Company (CDC) work closely as partners in the closing process to ensure that the 504 debenture funding occurs as smoothly as possible for everyone. An open line of communication is critical in ensuring that a file makes it to debenture funding in a timely manner, which equates to fewer loan modifications for the interim lender and a quicker transition for the borrower into repayment of principal and interest on their second mortgage with the SBA.

The Third Party Lender's note and loan documents must be correct (amounts must match the Loan Authorization and all subsequent amendments) and they cannot have any cross-default, “deem-at-risk,” or any other provisions which allow the Third Party Lender to make demand prior to maturity unless the loan is in default. The loan must not be open-ended and the Third Party Lender may not make any future advances, except for ordinary expenditures to collect amounts due to maintain the collateral.

The Third Party Lender must not establish a preference beyond its rights as a senior lender on the Third Party Loan without the prior written consent of the CDC/SBA.

A formal agreement between the Third Party Lender, the CDC and the SBA is executed in the form of the Third Party Lender Agreement and this document is always recorded.

The Third Party Lender is subject to a one-time participation fee of 0.50% of the senior mortgage loan. This fee may be paid by the Third Party Lender or Borrower, but it must be paid in advance of the file submission to the SBA.

Potentially, the Third Party Lender can also provide the interim financing for the 504 loan project as well as the permanent first mortgage loan. If the Third Party Lender provides the interim loan, the interim financing must be fully disbursed and the project completed prior to the sale of the 504 debenture.

At the time of 504 loan closing, the Third Party Lender and Interim Lender will be asked to execute certifications to the SBA that they have fulfilled all of the program requirements.

Florida First Capital encourages our Lending partners to participate in the Interim Loan in conjunction with the Third Party Loan as this allows them to be actively involved in our joint loan closing program. Through this program, the Lender is allowed to choose one of our highly skilled SBA Designated 504 Closing Attorneys to handle the entire closing process for both the permanent and interim loans, which ensures the Lender that the technical requirements of the loan closings are being adequately met, and provides a single legal point of contact (and accountability) for the loan closing. The joint closing procedure facilitates a smooth and timely closing transaction for the Lender, the Borrower and the CDC and ensures a complete and accurate package submission to the SBA, reducing both expense and risk in the closing.

This is a very brief outline of an extremely critical and important relationship that the Third Party Lender plays in the closing and debenture funding process. However, the CDC is your 504 loan closing expert so any questions that the Lender may have can always be directed to the CDC and we urge you to do so.

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. Website: www.ffcfc.com.