Third-Party Lender: What Does That Mean?

The financing for every SBA 504 project is provided by a Certified Development Company, such as Alloy Dev, and a “Third-Party Lender.” In most cases, the Third-Party Lender is a financial institution that provides the Third-Party Loan, which is usually 50% of the total project cost. But the SBA does not require that the Third-Party Lender be a financial institution. The SBA defines the Third-Party Loan as “a loan from a commercial or private lender, investor, or Federal (non-SBA), State, or local government source that is part of the project financing.” So while it’s rare, the Third-Party Loan could be from an individual or government source.

While the Third-Party Lender provides the permanent, non-SBA financing as part of the project, it is always necessary that interim financing be provided as well. As loans under the 504 program provide permanent or take-out financing, an interim lender is needed the cover the period between SBA approval and the debenture sale. The proceeds from the debenture sale repay the interim lender for the amount of the 504 project that it advanced on an interim basis. Interim financing may be provided by the Third-Party Lender or other experienced, independent source.

If the project is for the straight acquisition of real estate, the interim financing may only be needed for a short time to front the SBA portion of the financing at closing until the 504 debenture is sold. In that case, the interim financing may only be needed for 45-90 days. On the other hand, if the project involves major construction, the interim financing may be needed for several years.

The SBA does put some stipulations on the interim financing which includes that the financing cannot be derived from any SBA program, directly or indirectly. The terms and conditions of the interim financing must be acceptable to the SBA and the source cannot be the Borrower or an Associate of the Borrower. If the project is a construction project, the interim lender must have the experience and qualifications to properly monitor all project construction and progress payments. If the source of the interim financing lacks such qualifications, the SBA may allow the interim loan to be managed by a third party such as a bank or professional construction manager.

Being the “Third-Party Lender” for an SBA 504 project may be of interest to a private investor who is seeking a market interest rate return on their money with the security of a first mortgage on commercial real estate with a loan-to-value of around 50%. Feel free to contact Alloy at for further information.

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