New York Business Development Corporation 
Lender's Corner - FAQ
by Marlies Capobianco, Assistant Vice President, NYBDC
mcapobia@nybdc.com                    

Construction Lending and SBA Loan Programs - 504 and 7(a)

This month’s newsletter features a construction loan with Empire State CDC participating in the construction financing.  How can this be?  We all know that the SBA 504 loan cannot be funded until construction has been completed and the certificate of occupancy issued.

Lenders embrace the SBA 504 to address the Borrower’s limited equity, to limit exposure and/or to reduce (yes, reduce!) the blended interest rate to the Borrower.  Borrowers like the limited equity requirement and, of course, the 20-year fixed rate.  

Many of our SBA 504 loan projects involve construction financing.  In these cases our lending partner is faced with funding up to 90% of the project during the construction phase; a clear departure from policy for most banks.

Under a pilot program adopted by the boards of NYBDC and Empire State CDC in June 2006, Empire State CDC is now participating in construction loans to reduce the exposure of the lending partner during construction.

How does this work?

Under the pilot program, Empire State CDC will participate in the construction loan subject to credit committee approval and the following conditions:

a.   SBA approval of the permanent second mortgage financing under the SBA 504 loan program;

b.   The Empire State CDC loan is secured by a pro rata first mortgage with the lending partner or it participates in the lending partner's first mortgage for the term of the construction loan;

c.   The Empire State CDC loan amount is equal to the lesser of the net SBA 504 loan amount or $500,000; and

d.   A qualified construction risk manager is engaged to monitor the project and all requests for advances under the construction loan.

Our lending partner will be the lead bank and will engage the construction manager and monitor construction.  Empire State CDC will advance pro rata as requested and approved by the lending partner.  Our goal is to help our lending partners reduce exposure during construction; we will not make the administration of the construction loan more cumbersome.

On a related note, did you know that an SBA 7(a) guaranty may be available to support your loan project during construction as well as provide support for the permanent financing?  This is a little used aspect of the 7(a) loan program but it could make a big difference to your exposure when a project does not go as planned.  We have assisted a number of our lending partners structure and administer construction loans which benefit from the 7(a) guaranty during construction. 

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