Historic Properties & the SBA 504 Loan Program

The SBA 504 Loan Program can be an important component in historic preservation projects offering long-term, fixed-rate financing. But as a Federal Program, a Section 106 Review is required to ensure there is no adverse impact to the historic property. If done correctly, the rehabilitation may generate historic tax credits which can be used to offset some of the rehabilitation costs.

Section 106 of the National Historic Preservation Act mandates Federal agencies undergo a review process for all federally funded projects that potentially impact sites listed or eligible to be listed on the National Register of Historic Places. Most communities have historic properties which may trigger a Section 106 review. For example, Hamilton County, Ohio has 377 buildings, districts and archaeological sites currently listed on the National Register. And while a building might not be individually named on the National Register, if it is located in a historic district, the Section 106 rules apply if SBA funds are used in a potential project.

If there is no potential to affect historic property, there are no further obligations under Section 106. For example, if the proceeds of the loan are to be used solely to purchase the property and no renovations or changes are anticipated, the SBA counsel may make the determination that no further Section 106 review is required. If the local SBA counsel does determine that the requested activity has the potential to cause negative effects on historic property, then the SBA is required to consult with the relevant State Historic Preservation Officer (“SHPO”) to determine if the use of the proceeds of the loan will have an adverse effect on the historic nature of the property in question. Because of the timing needed to undertake the review, it is important that the SBA and SHPO be brought into the process early to avoid unnecessary delays.

Revitalization of historic properties can benefit the local community, but many times have higher costs which may make the property unattractive to a purchaser. To overcome this, federal historic tax credits were developed to encourage private sector investment in the rehabilitation and re-use of historic buildings. The federal tax credit allows program participants to claim 20% of the eligible improvement expenses against their federal tax liability. Typically, if the developers of the historic property are not in a position to use the tax credit, they will offer the credits to third parties to raise part of the equity funding for the project and thereby reduce the amount of debt financing needed for the property rehabilitation.

The SBA now allows 504 financing to be used when the historic tax credit is sold to a third-party investor. Under IRS regulations, the owner of property eligible for historic rehabilitation tax credits may lease the property, and transfer the historic rehabilitation tax credits to another party. The property is then simultaneously subleased back from the tax credit investor to the 504 borrower.

Copies of the draft lease and sublease must be submitted to the SBA with the 504 loan application, and prior to the 504 loan closing executed copies of the lease must be submitted to the SBA District Counsel for legal review. Other conditions included in the lease and sublease must be equal, the SBA lien cannot be subordinate to the tax credit investor and borrower leases, and the project may not be structured as an Eligible Passive Concern (EPC)-Operating Company (OC) transaction.

If you have any questions or have a historic property you are interested in purchasing with an SBA 504 loan, please contact us at 513-631-8292 or at lending@alloydev.org.

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