Many of you know that I used to teach Junior High English which is why today I am an SBA loan underwriter. My attempt at humor aside, sometimes lender questions come to me in my consulting role that remind me of the good old days in the classroom. Here’s a recent conversation with a lender that began with a false assumption. It happens. Even to the most experienced lenders. Time to put on my “teacher’s hat,” get everybody on the right track – and close the deal.

MR. CDC. Richard, I could use some help on structuring a new 504 deal. It’s a regular 504 project so you’d think it would be easy. But the appraisal came out to 95% LTV. And the borrower doesn’t have extra collateral for additional cash to lower the financing. Someone in the office says you might know a way to get this deal done.

ME.  Sure. I might. But first, I need to remind you of an old, but tried-and-true maxim: Never assume. So get rid of the notion that 504 lending has to do with LTV. Almost no 504 loan requires a certain LTV, be it 80%, 90% or 95%. We’re not an LTV program. Although we structure the financing on the lower of cost or appraisal, we do not require a loan to equal a minimum percent of value. We use the appraisal to inform our credit decision in the same manner we use credit reports.*

 The SOP says … If the appraisal comes in at less than 95% of the estimated value;

 “…the debenture must be reduced or, if available, the CDC must secure additional collateral or additional investment from the Borrower and/or guarantors that will be added to the required Borrower’s Contribution and will be sufficient to address the gap in value, If additional collateral or additional investment is not available, but the applicant demonstrates strong, consistent cash flow sufficient to support the debt, then the SLPC can approve the appraisal and the CDC may close the loan.” (SOP 50 10 6 Part 2, Section C, Chapter 1 2 b. i) page 488)

Let’s go back to Junior High Grammar, diagram this on a chalk board and see what we’ve got. Breaking down the elements to see how everything makes sense, we’re first dealing with the real estate appraisal. Equipment isn’t valued at the appraised value, but at cost. So we’re dealing with the real estate only and this is what’s left:

Total Project Cost = $1,440,000

– Equipment             (    175,851)

Subtotal                 $1,264,149


Required appraised value: $1,200,941.55.

If the appraisal comes at that amount at least, we can call it pretty and go home to dinner.

 MR. CDC.But hold on! The appraisal came in at $1,160,000. What now?

ME. Well then, the borrower must come up with more collateral or more cash. And if the borrower can’t do either? The SOP doesn’t make you decline the loan. Instead, if the applicant has “… strong, consistent cash flow sufficient to support the debt …” the loan can still be approved. Here’s what the SOP says:

“Generally, the CDC’s second lien on the collateral is considered sufficient collateral …if the applicant has:

  • strong, consistent cash flow sufficient to cover the debt;
  • demonstrated, proven management;
  • been in operation for more than two (2) years; and
  • the proposed Project a logical extension of the applicant’s current operations.” (SOP 50 10 6, Part 2, Section 2, Chapter 1, 2 a., b. ii), page 485)

No minimum LTV is required.

Class dismissed! I love these conversations and I love exploring the ins-and-outs of 504 lending along with you.

Richard Jeffrey
Senior Associate

*The only time we talk about loan-to-value in the 504 program is for projects that refinance only Qualifies 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)