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SBA 504 Q&A: Third Party Lenders and Additional Collateral

May 2014

Q: Can a Third Party Lender now take additional collateral on a Small Business Administration (SBA) 504 loan without the SBA also taking a lien against the collateral under the recently amended Code of Federal Regulation (CFR)? Will this still create a preference?

A: Yes, the lender can take additional collateral. Under the new rule, to do so no longer creates a preference. However, the expectation of the SBA is that its lending partners will continue to work with Certified Development Companies (CDCs) by letting them know when additional collateral is being taken. Previously, Standard Operating Procedure (SOP) 50 10 5(F) required the following related to a lender having a preference as it pertained to a 504 project:

“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. If SBA has knowledge (through a letter of intent/notice or commitment letter from the Interim and or Third Party Lender presented with the application package) of a requirement by the Third Party Lender for collateral in addition to the Project Property, SBA's issuance of an Authorization will be considered to be prior written consent for the preference. SBA may or may not choose to take a subordinate position on the additional collateral based upon the factors listed in Chapter 3. If the Third Party Lender does take additional collateral or otherwise have a preference, in the case of liquidation, any proceeds received as a result of a preference must be applied to the Third Party Lender's debt prior to the proceeds from liquidation of common collateral held by the CDC/SBA and the Third Party Lender. If the additional collateral or other preference no longer exists at the time of liquidation or has insufficient value to justify the cost of collection, then the Third Party Lender is not required to liquidate such collateral or other preference provided the Third Party Lender notified CDC/SBA and obtained CDC/SBA's written consent.”

However, the newly revised 13 CFR §120.920 now allows the Third Party Lender to take additional collateral, BUT only if:

a) In any liquidation, the Third Party Lender must first apply all proceeds from liquidation of additional collateral to the balance due on that loan; and

b) Then the Third Party Lender can apply proceeds from the 504 project property sale to the Third Party Lender loan; and

c) This is only for 504 loans.

The new Third Party Lender Agreement now states the following regarding the lender's ability to take additional collateral on the 504 loan:

Marshaling of Assets. If the Third Party Lender takes additional collateral as security for the Third Party Loan, in the case of liquidation, any proceeds received from such additional collateral, must be applied to the Third Party Lender's Loan prior to the proceeds from the liquidation of the common collateral held by the CDC/SBA and the Third Party Lender. If the additional collateral no longer exists at the time of liquidation, or has insufficient value to justify the cost of collection, then the Third Party Lender is not required to liquidate such collateral, provided the Third Party Lender notifies the CDC/SBA.

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