The Small Business Administration (SBA) has issued a rule that will eliminate the section of the SBA guide which limits project expenses eligible for 504 Loan Program financing to those incurred within nine months prior to receipt by SBA of a completed loan application. This change will permit financings of expenses toward a project regardless of when they were incurred as long as they are directly attributable to the project.
“This does not sound like a big deal, but we have two 504 projects that are applicable; one closed and the rule change was too late to help the sponsor, and the second project is only moving forward based on the rule change, which is an example of its significance,” noted Michael D. Sneden, Executive Vice President at ValueXpress.
In the first deal, the sponsor spent $750,000 to demolish an existing structure on the project site, and thereafter completed a lengthy rezoning and approval process that took 12 months. Because the project proceeded after the 9-month window had expired, the demolition costs were not eligible 504 project costs.
The second deal was impacted even more by the rule. The sponsor was to construct a new franchised limited-service hotel in New York City. In order to secure a tax abatement, the sponsor had to complete site demolition, clearing excavation and a foundation, which it did at a cost of nearly $2 million out of an overall project cost of $10 million. Approvals took 14 months. Once the sponsor learned that the site preparation and foundation were not 504-eligible expenses, the sponsor turned to other alternatives; with the rule now in place, the 504 project can proceed with the full $10 million as eligible 504 costs.