As there are every year, there are some updates to the 504 Program that we want you to be aware of this coming year. Here are the top 10 most notable changes that will be effective January 1, 2018:
- Borrower Contribution for Special Purpose Properties: Business owners buying gas stations, car washes, hotels, assisted living facilities, hospitals, or any other single use properties will continue to require a down payment of a minimum of 15% down payment for their first project financed with the SBA 504 loan program. Subsequent special purpose projects will require a 20% down payment. The SBA also reduced the number of industries considered “special purpose” because of new development standards that may not deem a project a special or single purpose use. Properties financed with the SBA 504 loan that are not special purpose still feature a down payment of as little as 10%.
- Eligibility: The Applicant must meet all eligibility requirements at the time of application and at the time of closing and disbursement, except the size standard, which must only be met at time of application.
- Credit Elsewhere: SBA has expanded the credit elsewhere test. The prior test was limited to Applicant’s ability to obtain a loan on reasonable terms without a Federal government guaranty, and Applicant’s ability to obtain funds from the resources of the applicant business. The new SOP expands these into two broad categories:
“Sources related to the Applicant” which now includes the liquidity of owners, spouses, guarantors, Associates, and the Applicant business
“Sources unrelated to the Applicant” which includes conventional lenders or other sources of credit (i.e. a commitment from a franchisor)
- EPC Rule: The significant change is the ability to finance the change of ownership between existing owners of an EPC (Eligible Passive Company) as long as the real estate has been held by the entity for at least 36 months. The CDC will justify that jobs would be lost without the change in ownership.
- Spousal Guarantees: The language has been changed related to spousal guarantees. If the combined ownership of spouses in the EPC or OC totals 20% or more, both spouses must guarantee.
- Refinance without Expansion: Businesses seeking to refinance commercial real estate can continue to take advantage of pulling cash out for business expenses; however, the cap on cash out will be 20% vs. today’s 25%. “Other Secured Debt” is no longer eligible to be included in the refinancing project. It is eligible to allow the refinance of credit card debt if business related and in the name of the business.
- Appraisals (LTV): SBA increased the threshold for an acceptable minimum appraised value from 90% to 95% of estimated value without requiring a reduction in the debenture.
- Life Insurance: The SBA will require Life Insurance more often for borrowers including sole proprietorships, single member LLCs, or for businesses otherwise dependent on one owner’s active participation. Amount and type of collateral available to repay the loan may be considered in determining the appropriate amount of life insurance.
- Aggregate Financing for Green Energy Projects: Renewable energy and 10% energy savings projects may still receive $5.5 million per project, however it is now limited to $16.5 in the aggregate per borrower. The outstanding 504 lending authority used under regular or alternative energy public policy does reduce lending authority under 7(a) or Community Advantage.
- Franchise Update.The SBA has created a Franchise Directory, which includes all franchise and other brands reviewed and deemed eligible by the SBA for SBA financial assistance. No other review of the franchise will be required, eliminating inconsistent decisions and backlogs. If the franchise is not on the registration, then the CDC must submit the franchise for a pre-application review.
TMC Financing is a Premier Certified Lender with the SBA with over 35 years of experience. If you have any questions regarding any of the changes above, contact a TMC 504 loan expert. Keep in mind, TMC Financing is your SBA 504 Expert and can navigate through all these policies so you don’t have to.
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