Land: The project may include land, no matter how long it has been held. The value of the land will be at cost if acquired within two years of application. If the land was acquired prior to that time, the value also will be at cost unless the small business submits a professional appraisal acceptable to SBA establishing a different value. The appraisal should include the sales history of the property during the last five years. A party other than the borrower, its associates, or the present mortgagee must conduct the appraisal.

Land Improvements: Land improvements integral to the project can be included as eligible project costs except those improvements that are to be paid through special tax assessments or user fees. Examples of eligible land improvements are grading, new streets including curbs and gutters, parking lots, utilities, and landscaping.

Building Construction: All construction costs can be considered part of the 504 project cost.

If the SBA business loan involves the construction of a new building, a Borrower may lease up to 20% of the square footage of the rentable property (total square footage of all buildings or facilities used for business operations) on a long term basis, provided that the Borrower immediately occupies at least 60 percent of the rentable property with plans to occupy some of the additional space within three years and plans to occupy all of the remaining space not leased-out on a long term basis within 10 years.

Purchase of an existing Building and Building Improvements: The costs to acquire and improve an existing building are eligible provided that the purchase price is supported by an appraisal acceptable to SBA.

For a project that is partially leased out, costs for improvements that are an integral part of the structure of the building are eligible project costs. Examples of these costs would be facade expenditures, heating, electrical, plumbing and roofing costs. However, costs in connection with finishing the interior space to be leased out are not eligible. The Borrower must occupy at least 51 percent of the Rentable Property. The balance of the Rentable Property may be leased out, on a long term basis, to any third party, if the loan proceeds were not used to remodel or convert the space to be leased out.

Machinery and Equipment: All costs associated with the purchase, transportation, dismantling, or installation of machinery and equipment can be considered part of the project cost. (If the project is only for machinery and equipment, the machinery and equipment has to have a useful life of at least 10 years.)

Furniture and Fixtures: Furniture and fixtures can be included in the project as eligible project costs if the dollar amount compared to the total project is minimal and will not affect the maturity based upon a weighted average useful life.

Professional Fees: Expenditures for professional services and fees directly attributable and essential to the project are eligible. Examples are:

1. Legal expenditures for zoning changes, title searches, title insurance, and recording fees;
2. Engineering and architectural costs, as well as appraisals;
3. Environmental costs like site assessments, phase I and/or phase II studies;
4. Interest and points on the interim construction loan;
5. Impact and permit fees and utility hook-up fees;
6. Surveys; and
7. Certifications required by SBA (such as earthquake, flood, IRS, certificate of occupancy, and certificate of completion).

Contingency Fund: You should consider requiring a contingency amount not to exceed 10 percent of the construction costs to avoid problems in financing cost overruns. If the residual contingency amount does not exceed 2 percent of the debenture just prior to closing, it may be refunded to the small business at the time the debenture is funded. If the contingency residual is in excess of 2 percent, the debenture has to be reduced by the excess amount.

I. Expenditures Made in Advance of 504 Loan Processing

Expenditures within 9 months of the date of the application, including land, building, and/or equipment, can be included in the project costs and be reimbursed by the interim lender net of the equity requirement. Costs incurred prior to that date might be included solely at SBA's discretion.

The regulations provide for the acquisition of land without any limitation of time prior to the application. There are many situations where land is acquired prior to its actual use in a business. Examples of this could be:

1. The land came on the market before the business needed it;
2. The neighboring land had to be developed before development of the project land made economic sense; or
3. The small business was anticipating its future needs.

You can consider the refinancing of any previous financing of the land as an eligible 504 project cost if you determine that the intent of small business was to finance the purchase on a "short-term" (interim) basis until the entire project was completed. Existing debt is considered "interim" debt under the following circumstances:

1. All the debt on the land can be considered "bridge financing" and, therefore, eligible to be refinanced by the 504 project proceeds, if all the land is to be used in the project and the financing is "short-term" in nature.
2. If only part of the land is to be used in the project, only a prorata share of the debt can be refinanced by the 504 loan proceeds.

The land has to be part of a 504 project that includes construction or renovation of a building(s).

II. Ineligible 504 Project Costs

Costs not directly attributable and necessary for the Project may not be paid with proceeds of the 504 loan. These include, but are not limited to, the following:

1. Debt refinancing (other than interim financing)
2. Third-Party Loan fees (commitment, broker, finders, origination, processing fees of permanent financing)
3. Ancillary business expenses, such as:
   1. Working capital;
   2. Counseling or management services fees;
   3. Incorporation/organization costs;
   4. Franchise fees; and
   5. Advertising
4. Fixed-asset Project components, such as:
   1. Short-term equipment, furniture, and furnishings (unless essential to and a minor portion of the Project);
   2. Automobiles, trucks, and airplanes; and
   3. Construction equipment