I’ve been in this business awhile. OK a long while. So I tend to think I know all the regs by heart. It doesn’t happen often, but I admit it: Sometimes a question causes me to check the regs just to make sure nothing has changed. It happened the other day when Jeremy sent me an email.
Q: Richard, this is strange. We have a project where the borrower wants one bank (Bank A) to finance part of the project, and another bank (Bank B) to finance another part. The proceeds from Bank B’s loan will lower the amount of Bank A’s loan, and both will end up being lower than the net debenture. Can that happen? How can that work?”
A: Jeremy knows his SOP. The TPL cannot be less than the 504 net debenture. And if the project is for a special-purpose building or a new business, the TPL has to be at least 50% of the eligible project costs. Yet nothing in the regulations prohibits multiple third-party lenders.
Structuring the loan. Situations with multiple TPLs that I’ve seen most often are where one TPL is used to finance the real estate portion of the project, while another finances the equipment. In this case there can be one 504 loan, but two TPLs. The term of the 504 loan depends on which part of the financing is the larger portion: the real estate or the equipment? The CDC gets two third party lender agreements, but other than that, there is nothing extraordinary about structuring.
Checking Out the Regs. Chances are you can think of many more creative structures. But don’t let your imagination run wild. Here’s where the regs come in. For example, the maturity of the TPLs must meet program guidelines. The combined amount of the TPLs must be no less than the net debenture (or less than 50% for start ups or special purpose buildings). SOP 50 10 (K) Subpart C, Chapter I, IV, pg. 266) But theoretically you could have a structure like this:
Eligible Project Cost: $1 million
- TPL #1: $250,000
- TPL #2: $250,000
- 504 net: $400,000
- Equity: $100,000
… or any combination where the combined TPLs are not less than the net debenture.
Another trick about this. There is no requirement that both TPLs be senior to the 504 loan. In theory, one of the TPLs could be in a subordinate collateral position. That might seem unlikely. But a mezzanine lender could be comfortable in that position, as could an entity other than a financial institution. In the latter case, SBA must be able to rely on the representations made in the TPL agreement, so a certain amount of sophistication on the part of the lender is required.
One caveat in this situation: The TPL cannot be an associate of the borrower, so it is helpful to review how SBA defines “associate.” You’re an avid reader of our eBulletins. So I’m confident you know all about “associates.”
It pays to check out what you’re pretty sure you know. Keep those questions coming!
Senior Associate, CDC/504 Programs