Every now and then I get a question about structuring a 504 project based on the appraised value, as if 504 had some sort of LTV requirements. Actually, I get this question more often than I’d like. And I feel very disappointed when it comes in. Again. As I covered in my recent eBulletin (09/01/2021) “ …What’s LTV Got to Do With It …?” Answer: Nothing. After all, 504 financing is based on eligible project costs, not collateral value. I thought I’d conveyed that several times over the years. Anyhow, here’s the question:
MR. CDC. Richard, I have searched the SOP at least five dozen times and I still cannot find the answer to this question: What are the LTV requirements for a 504 refi with expansion?
ME. Well, no wonder you couldn’t find it in the SOP. It’s not there. Let’s review the background: The SBA 7(a) program was established under the Small Business Act. But the 504 program was established under the Jobs Act. It’s meant to be a stimulus to economic growth. There never was, and still is not, a requirement that ALL 504 loans have a certain LTV; 504 loans are structured according to eligible costs.
This has also been true for 504 refi. Until this year. One of the provisions of the new 504 Refi Rules modifies that. For projects that refinance only Qualified Debt, the maximum loan-to-value is 90%.* And if you throw in some eligible business expenses, the maximum loan-to-value is 85%. Clearly the regs limit the amount of refi unless there is an expansion.
And that, after all, brings us back to our roots, the raison d’être of the 504 program: to stimulate economic growth. Over the years it has done just that.
Any questions about this subject? Golly, I sure hope not. But I’m always glad to hear from you!
Senior Associate, CDC/504 Program
*The only time we talk about loan-to-value in the 504 program is for projects that refinance only Qualified Debt. Then the maximum loan-to-value of the Refinancing Project allowed is 90%. (SOP 50 10 6, Part 2, Section C, d. i. pg. 466)