CAPlines: Builders' Lines of Credit

April 13, 2006

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Short-term loans and lines of credit are available to building contractors to finance the construction or renovation of residential and commercial buildings for sale. Eligible businesses are construction contractors and home builders that meet SBA size and policy standards. In addition, eligibility for this program requires construction contractors and homebuilders to:

Have already demonstrated the managerial and technical ability to build or renovate projects comparable in size to those for which they are seeking SBA financing.
Submit three letters to SBA (or to the participating lender). A letter must come from: (1) a mortgage lender doing business in the area affirming that permanent mortgage financing for qualified purchasers of comparable real estate is normally available in the projects area; (2) an independently licensed real estate broker with three years of experience in the project area (the letter must state whether a market for the proposed structure exists and whether it is compatible with other buildings in the neighborhood); and (3) an independent architect, appraiser or engineer, confirming availability of construction inspection and certification at intervals during the project. The writer of this third letter cannot be affiliated with the applicant in any way.
The cost of construction inspections must be paid by the applicant and can be paid from the loan proceeds.

The total maturity of the loan cannot exceed five years, but each separate project should not exceed 36 months, plus a reasonable estimate of the construction or renovation period. Loan proceeds may be used solely for the direct expenses of acquisition, immediate construction, and/or significant rehabilitation of the residential or commercial structures.

Principal repayment may be required in a single payment when the project is sold. Interest payments, however, are required at least twice a year and must be paid from the applicant's own resources, not from loan proceeds. Interest rates are negotiated with the lender but may not exceed SBA's maximum interest rates under its regular guarantee loan program.

Loans for the project must be secured by not less than a second lien on the property to be constructed or renovated. The total amount of the first and second liens on a property cannot exceed 80 percent of the contractor's anticipated selling price. The first lien must include provisions for transferring clear title to the purchaser of each parcel. The SBA will not take a second position in a subdivision that is subordinate to a lien requiring the entire loan to be paid in full before any property is released.