At JRB we deal with all sorts of SBA lenders including CDCs, so we frequently get calls from 7(a) lenders looking to structure a 504 loan. This situation came in recently:
Q: Richard, I have a loan request from an assisted living center. They’re building two new facilities for $20 million in total costs. The borrower has $4 million to put in. I know an SBA loan cannot exceed $5 million. I want to avoid a large exposure and the borrower wants to limit their injection. Got any ideas on how to structure this?
A: Of course, the first thing that came to my mind is that the lender needed to consider a “Green 504” loan or even two loans for this project. When I suggested that to the lender (who is an experienced SBA 7(a) lender) his response showed that he never heard of a Green 504. So I walked him through it:
He’s right of course that SBA will not have more than $5 million exposure to any borrower, including exposure to affiliated businesses. But here’s the good news: Green 504 loans don’t count against SBA’s $5 million exposure. SBA’s Green 504 loans have their own limits: 1) No loan greater than $5.5 million and; 2) Total Green loans to any borrower and affiliates cannot exceed $16.5 million.
Since the lender’s project was for new construction, the project would need to generate more than 10% of its energy from renewable energy sources to qualify for a Green 504. I told the lender, “Think Solar.” I added that I was sure the prospect would consider adding solar power to its project because they’d benefit from savings in utility bills and the 504 fixed rate. Most importantly, he could do the deal!
How it could work. Assume the cost for each facility is $10 million. The borrower has to contribute $2 million per project. The Green 504 finances $3 million for each project. And the lender’s loan is $5 million per project. SBA’s total exposure is $6 million which exceeds the usual SBA cap. But the loans are Green, so SBA’s $6 million exposure is OK. In fact, the borrower has lots of availability left, as the total it can have in Green loans is $16.5 million.
The lender reacted as if I just sent him the best holiday present ever! Now he could be getting ready to call your CDC with an $6 million 504 referral. Make sure you’re ready to answer the phone!
And of course, if you need more information about how Green 504 works, give me a call.
Associate, CDC/504 Programs