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SOP Revisions Affecting 504 Lending

Jun 2012

The Small Business Administration (SBA) has released Standard Operating Procedure (SOP) 50-10(5)(E) for lender and certified development company (CDC) loan programs, including the 504 program. It became effective June 1, 2012.

SOP 50-10(5)(E) is available on the SBA website in both clean and track changes versions at: http://www.sba.gov/lender-documentation-tool?type=sops or http://www.sba.gov/for-lenders.

Following is a summary of the 504 program policy changes:

Pg. 274 -- Franchise Information Assistance: CDCs should, but are no longer required, to go the SBA Franchise Findings List for information with respect to a specific Franchise/License/Dealer/Jobber or similar agreement. The other procedures for use of the franchise registry and pre-application review of agreements remain the same.

Pg. 277 -- Franchise Agreement Control Factors: A requirement that that the franchisee or EPC owner must sell its real property to the franchisor upon expiration or breach of the franchise agreement is an unacceptable control provision. SOP 50-10(50(E) provides that a requirement that the franchisee or EPC owner lease the real property to the franchisor on reasonable terms for the remainder of the term of the franchise agreement is acceptable.

Pg. 290 -- Cooperatives: There are 3 changes for cooperatives:

(1) Producer Cooperatives: In addition to the other requirements, the cooperative itself must be small.

(2) Agricultural Marketing Cooperatives: An agricultural marketing cooperative acting pursuant to the provisions of the Agricultural Marketing Act (12 USC 1411j) is considered to be a producer cooperative and is eligible if it meets the requirements for eligible producer cooperatives.

(3) Worker Cooperative: A worker cooperative, in which the employees of the small business cooperatively own the company, is eligible if it meets all other SBA eligibility requirements.

Pg. 307 -- Short Term Debt ("Bridge Financing"): Previously, bridge financing was an eligible Project Cost only if there was no building currently on the land at the time of application. Version (E) of the SOP now provides that bridge financing may also be an eligible project cost if there is a building on the land that will be razed prior to construction of the new building. Destruction of the building is considered to be part of the cost of the preparing the land for new construction. Both the value of the land and new construction must be supported by an appraisal that complies with SOP 50-10(5)(E).

Pg. 319 -- Appraisal Client or Intended User: The appraisal must identify the SBA as the client or an intended user of the appraisal (as those terms are defined in USPAP). The CDC also may be identified as the client or an intended user. It is acceptable to the SBA if the appraisal identifies the third party lender as the client and the SBA as an intended user.

Pg. 345 -- Pricing a 504 Debenture: The incorrect citation to 13 CFR 120.971 has been corrected to 13 CFR 120.931.

Pg. 345 -- Energy Public Policy Goals: The "and" between the energy public policy goal of reducing the Borrower's energy consumption by at least 10% and the energy public policy goal of plant, equipment and process upgrades of renewable energy sources has been changed to an "or."

Pg. 353 -- Professional Service Contracts: If the CDC has a professional services contract with an individual or entity to provide various services such as marketing, packaging, etc., then fees paid by the CDC under the contract cannot be passed on to the small business applicant, "other than reasonable costs associated with assisting the small business applicant with its portion of the application (loan packaging)." The quoted language has been deleted so reasonable costs also cannot be passed on to the applicant.

Pg. 354 -- Compensation of Agent Initiated by Applicant: An agent (defined on Page 353) may be paid by the small business applicant as long as the compensation is reasonable and customary for the services, the compensation complies with the 7(a) requirements in Subpart B, Chapter 3, Paragraph VI.B.1. of the SOP, and the compensation is not contingent on the 504 loan being approved.

The Subpart B requirements are on pages 169-70 of SOP 50-10(5)(E). Paragraph VI.V.1. provides:

1. The lender or a third party may charge a small business applicant fees for packaging and other services. “Packaging services” includes assisting the small business applicant with completing the application, preparing a business plan, cash flow projections, and other documents related to the application. “Other services” includes consulting as to what financing is needed and what type, broker or referral fees. The fees must be reasonable and customary for the services actually performed and must be consistent with those fees charged on the lender's similarly-sized, non-SBA guaranteed commercial loans. In addition, fees for packaging and other services may be based on a percentage of the loan amount. With regard to fees for packaging or other services charged based on a percentage of the loan amount, in no event may the fee exceed 3% on loans of $50,000 or less, and for loans over $50,000, 2% on the first $1,000,000 and an additional ¼% on amounts over $1,000,000, with a maximum fee of $30,000. A standard fee charged to all small business applicants is not acceptable.

The underlined language is also a change in Version (E) for 7(a) lenders.

Please note that a percentage fee is now permitted.

For more information about SBA 504 loans in Florida, contact Florida First Capital by visiting www.ffcfc.com, emailing at info@ffcfc.com or calling 888.320.5504.