Wow. When I started talking about Green 504 loans, I had no idea how fast lender interest would grow. Green 504s are a great growth opportunity. Yet, rules governing Green 504s are somewhat tightened under the new SOP 50 10 5 (K), which has spawned some lender confusion. Before we move on to other topics, let’s take one more look at The Greens:

Q: Hi Richard. We’ve been following your eBulletins on Green 504 loans, and have discovered more and larger lending opportunities as a result. Now, here’s my question. We have a loan request we think might qualify for a Green 504, but we need your help structuring it. Our borrower owns two grocery stores in our area and has a chance to buy a third. The building he’s looking at was a large grocery store, but it’s been vacant for two years. This will be the borrower’s third location. He already has two 7(a) loans totaling almost $5 million. Can we show that he will have energy savings of 10% over the existing two stores, or must we show that he will generate 15% of the energy in his third store from renewable energy sources?

A: Grocery stores use a lot of energy for refrigeration and lighting, and the systems powering them are excellent targets for energy savings. That said, if the new 504 project is to buy an existing grocery store and install energy saving devices, it’s likely that the project could have demonstrated 10% in energy savings over its current use. But the building has been vacant for the last two years. So there is really no prior energy use to demonstrate that the project will have 10% energy savings.

We could be tempted to look at the energy use of the other two stores and project that the new location would use less energy than the current locations. But the SOP doesn’t allow that. To qualify under the 10% energy savings, the applicant must either retrofit an existing facility, or a new facility must replace an existing facility. If the applicant was closing one location to move to the new one, a case might be made. But your borrower wants to keep his two stores and open a third. Qualifying under the 10% energy savings is just not going to happen. (See SOP 50 10 5 (K), Subpart C, Chapter 2, IV., A. 2. a., pg. 309; Subpart C, Chapter 7, I. 2. b. ii. a., b., iii. c. pgs. 355, 356.)

Instead, your borrower must demonstrate that 15% of the energy used in the new location will come from renewable sources. That might seem like a tall order. However, the below market fixed rates on 504 loans and the opportunity for low energy bills could justify the expense of installing new renewable energy sources. Time for your borrower to sit down with a contractor and figure it out!

There’s much to talk about as new SOP becomes effective April 1. We love getting your questions. Keep them coming!

Richard Jeffrey
CDC/504 Associate