Who finances a 504 project during construction?
Short answer
An interim lender, often the same bank that holds the third party loan. It funds project costs until completion, and debenture proceeds repay it. Neither you nor an Associate of yours can be the interim lender (SOP 50 10 8.1, Sec. C, Ch. 1, Para. B; 13 CFR § 120.890).
An interim lender finances the project between SBA approval and the debenture sale. The 504 loan itself is permanent, take-out financing (SOP 50 10 8.1, Sec. C, Ch. 1, Para. B, Interim Financing).
Who can be the interim lender
- The third party lender, or another experienced, independent source (13 CFR § 120.890).
- A Certified Development Company (CDC), but only on a project another CDC is financing.
- Not you, an Associate of yours, or any source funded by an SBA program.
Interim financing can cover all project costs except your contribution.
How it is documented
The third party lender can use a separate interim note. It can also use a single note that the net debenture proceeds reduce.
When the debenture can close
The interim financing must be fully disbursed and the project finished before the debenture sale. One exception lets debenture proceeds go into escrow for a minor part of the project (Sec. C, Ch. 2, Para. C.1, p. 270). Escrowed funds not disbursed after 1 year pay down the third party loan.
The loan must be disbursed within 48 months of approval unless SBA grants an extension (Ch. 2, Para. A).
Acting as your own contractor
Do-it-yourself construction is allowed only if the CDC documents three things. You are experienced and licensed. The cost does not exceed what an unaffiliated contractor would charge. You earn no profit (Sec. C, Ch. 1, Para. C.9).
Before closing
The interim lender, you and the CDC must each address whether there has been an unremedied substantial adverse change (13 CFR § 120.892).
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