February 7, 2018

Best Practices: Financing Involving Historic Rehabilitation Tax Credits Now Eligible for 504 Loans

by Janet M. Dery

The revitalization of historic buildings can benefit a local community by creating new jobs in that community. These projects, however, frequently have higher costs, greater design challenges, and weaker market locations, which means they are not as attractive to lenders and investors. To combat this, federal historic tax credits were enacted to attract private capital investors to assist with the revitalization of those historic properties that have a financing gap between what banks will lend and the total development costs of such revitalization projects. Many states, also recognizing this need to attract private investment for such projects, have enacted their own state historic tax credit programs that work in tandem with the federal historic rehabilitation tax program.

Up until recently, SBA 504 loans could not be used in such revitalization projects. Now, with the enactment of Subpart C, Chapter 1, Section IV.E. of SOP 50 10 5(J), which became effective on January 1, 2018, the SBA may now participate in 504 loan projects involving such historic rehabilitation tax credits under the following circumstances.

In situations where the Borrower is the owner of the project property, such property may be leased by the Borrower to the tax credit investor and then must be simultaneously subleased back from the tax credit investor to the Borrower.

  • The term of the sublease must be equal to the term of the lease to the tax credit investor.
  • Copies of the draft lease and sublease must be submitted to the SBA with the 504 loan application.
  • Prior to closing of the 504 loan, the executed copies of the lease and sublease must be submitted: (i) to SBA to confirm the terms of the executed lease and sublease are equal, and (ii) to the local SBA District Counsel for legal review.
  • SBA’s lien on the project property must not be subordinate to the lease between the Borrower and the tax credit investor.
  • The loan may not be structured as an EPC-OC loan.
  • The transfer of the rehabilitation tax credits from the Borrower to the tax credit investor must comply with all applicable Internal Revenue Service and/or State requirements for such transfer.

For more complicated structures involving the transfer of the historic tax credit to a tax credit investor, or for additional guidance on financing such a transaction with a 504 loan, the Certified Development Company (“CDC”) and the Sacramento Loan Processing Center should consult with the local SBA District Counsel and the Office of Capital Access.

If a Bank is acting as either the Third Party Lender or Interim Lender in such a 504 loan, it should make the Borrower aware of the above requirements as early in the process as possible since the draft lease and sublease need to be submitted by the CDC with the application for the loan. Also, as a best practice, it should make sure the lease and sublease have been fully executed and approved by the SBA and local SBA District Counsel before closing on its loan.

For more information on SBA 504 projects involving historic rehabilitation tax credits, contact Janet at