When can the 504 loan close?
- If there is no renovation or construction included in the project costs, the 504 loan can close at the same time the bank loan closes. A final occupancy permit is required for all newly constructed or renovated facilities. Generally, all the work must be complete for a final occupancy permit to be issued by the county.
- All the funds for the project must have been spent (except construction interest to the date of the bond sale which can be estimated). We will work with< your lender to collect the disbursement records.
- The borrower’s equity injection must have been made. BFG is responsible for assuring that the required equity has been contributed to the project and all the funds have been spent on eligible project costs. If your equity is contributed at the initial settlement and is evidenced by the settlement statement, no further documentation is required. If you pay some of the costs directly, we will request copies of the invoices and cancelled checks to verity your equity.
How does BFG fund the 504 loan?
- BFG is a non-profit organization, and does not have deposits like a bank would use to fund loans. Instead, we access Wall Street and the capital markets funding approximately $350 million of 504 loans nationally on a monthly basis. Closed loans from across the country are pooled and are sold through Bank of America Merrill Lynch or Credit Suisse First Boston. SBA provides a guarantee to the investor buying the bond product. Based on the SBA guarantee, you receive attractive, below market long term fixed rates on your 504 loan.
- Once a 504 loan has closed, the risk of funding is minimal. The 504 bond sale occurred every month during the recent financial crisis providing attractive rates to our borrowers.
- The interest rate for your 504 loan cannot be “locked in” at application. The interest rate is market driven (the ten year Treasury plus costs plus a spread to the investor buying the product) and is set two days before the sale. Please click here to see the interest rate history for 504 loans.
Since the 504 funding mechanism is the bond market, are there prepayment penalties associated with the 504 loan?
- Investors do not want to be prepaid. They are making a long term investment offsetting long term obligations. In order to make the product attractive to investors (providing you with an attractive interest rate) yet allow the small business flexibility, there is a prepayment penalty should you prepay your 504 loan BUT ONLY DURING THE FIRST HALF OF THE TERM (5 years for a 10 year loan, 10 years for a 20 year loan. The penalty is based on the investor’s rate (the 10 year Treasury plus a spread) and the rate declines by 10% annually. A sample is included below:
|Sample for Discussion Only|
|SAMPLE PREPAYMENT SCHEDULE|
|Bond Term:||Debenture Priniciple Amount|
|Payment Date||Premium Amount*||Prepayment Rate|
|*Premium Amount is based on Debenture Balance – No Penalty after the 10th Year|
Can the property be purchased by a real estate holding entity and leased to the operating business?
- Yes. If the borrower is different from the operating business, there must be a lease between the Borrower and the Operating Company for 100% of the property being financed with a 504 loan. The rent may not exceed the debt service and operating costs of the property. Click here for a sample lease or sample lease amendment if you already have a lease.
- If there are third party tenants, the sublease must be between the Operating Company and the third party tenant.
- Every lease and sublease on the property must be made subordinate (or junior) to the 504 Deed of Trust. The Operating Company and any subtenants must sign the Subordination Agreement related to their lease or the sublease may be assigned to the Operating Company.
- You should consult your legal and tax advisors before using any sample forms.
When do we contribute our down payment?
- The equity contribution must be made prior to the closing of the 504 loan. Most lenders require that the borrower contribute the required equity first (i.e., at the initial closing). If you contribute your equity along the way, please retain copies of invoices and cancelled checks as BFG must verify that the equity has been contributed.
Are any additional documents required for construction loans?
- At application, copies of the construction bids that support the project budget are required.
- During the construction process, the title company will typically require a wall check survey to assure the building is properly located (the lender will notify you if it is needed)
- For your permanent loan closing, the title company will collect the following
- Mechanic’s lien releases
- An as-built survey
- For the 504 loan closing, we will need your final Certificate of Occupancy and we will need to document the project costs (typically we use the bank’s disbursement records).
What are the insurance requirements for the 504 loan?
- Hazard insurance must be obtained for the property and equipment for full replacement cost with a mortgagee clause in favor of SBA and Business Finance Group. Evidence of liability and workmen’s compensation insurance must also be provided. The insurance must be in place at the time of the 504 closing and throughout the life of the loan.
Are new financial statements required at closing?
- Financial statements dated within 120 days of closing must be submitted. If your closing occurs closely following the approval, and the financials used at application are not more than 120 days old, no new financial information will be required.