New client Abel Lender was quite pleased with himself. Some requests for 504 loans had been quite complex lately, and Abel had struggled to develop compliant financing proposals. But not today! On this day he figured there were at least two ways to finance a new prospect’s loan request. He and I discussed alternatives:

ABEL. Richard, my prospect purchased a hotel in December 2022 for $6.6 million. The acquisition was financed by a mortgage company with a $5.5 million, 24-month note, interest payable monthly. Subsequent to the purchase, the prospect ran the hotel for a few months and then shut it down to do the capital improvements. These ended up costing $1.1 million which he paid with his own cash. Now the mortgage company loan is coming due, The prospect wants to pay that off and recoup the cash used for capital improvements. The hotel’s estimated appraised value is now at least $8 million.

My Question: Do I have a loan to refi existing debt without expansion?  Or am I making a loan to provide permanent financing for the hotel acquisition?

ME. You don’t really have an application for a loan to refi debt. For that, the Applicant’s financial statements submitted at the time of application would have to show that it had been in operation for all of the 2-year period ending on the date of the application.1

It doesn’t matter how many years the hotel may have been in business when your prospect bought it in 2022. Because it closed operations soon after the purchase, it fails to meet the requirement for being in operation for all of two years ending on the date of the application.

Now, what you’ve got is an application to provide permanent financing for acquiring fixed assets. Your eligible project costs are $7.6 million (acquisition price of $6.5 million; capital improvements of $1.1 million). To that you can add the interest and fees on the interim loan, professional fees, and so on. Because it is a special-purpose building and the business hasn’t been operating for at least two years, your financing is limited to 80% of eligible project costs ─ $5.68 million.

Richard Jeffrey, Senior Associate
CDC/504 Program
richard@jrbrunoassoc.com
www.jrbrunoassoc.com

1SOP 50 10 7.1 p. 29