Recent revisions to the Small Business Administration’s (SBA) 504 refinancing program create a unique and time-driven opportunity to bring a lender’s owner-occupied commercial real estate portfolio into regulatory compliance, reduce overall commercial real estate portfolio concentrations, and provides an additional tool for lenders to offer their small business clients.
This program allows small businesses to take advantage of long term, fixed rate loans to refinance their higher interest or maturing real estate debt or existing debt on capital assets. Loans under the 504 Program are funded by the sale of ten-year and twenty-year bonds guaranteed by the SBA. Thus, a borrower is able to obtain attractive 20 year fixed interest rates, as low as 5.04% based on the January pricing.
With a traditional 504 loan, a bank holds the first lien position and their exposure is reduced through the Certified Development Company (CDC) which provides up to 40% (or an amount not greater than the bank) of the project cost and takes a secondary position to the bank loan. The small business borrower must either have at least 10% existing equity in the property or must inject equity of at least 10%. The amount of the bank loan must be at least as much as the 504 loan.
The bank’s first lien position, at a low loan-to-value ratio, makes partnering with a CDC on a 504 refinance loan a wise choice. The bank’s rates can be fixed or floating. The only stipulation is that the first lienholder loan must be for at least 10 years for a commercial real estate loan and at least 7 years for a 10-year equipment or machinery loan. The bank utilizes its own underwriting standards and sets its own terms, interest rates and fees.
While there is no maximum project size, the 504 second mortgage loan is limited to $5 million in most refinance projects just as with the traditional 504 loan. The upper 504 loan limit increases to $5.5 million for eligible manufacturing projects and energy saving technology entities.
The following are some of the primary requirements of the SBA 504 Refinance Loan Program:
• The small business must be for-profit and have a tangible net worth of less than $15 million and an after tax profit of less than $5 million for the previous two years.
• The small business must occupy at least 51% of the property at the time of the refinance application.
• The property must have been acquired at least two years ago with non-SBA commercial debt.
• The project structure must be based on the current appraised value of the collateral.
• Up to 90% of the current appraised property value may be refinanced.
• Existing government-guaranteed loans are not eligible to be refinanced.
• Expansion projects are not eligible to be refinanced (there is an option for refinancing under a modified version of 504).
EXAMPLE OF REFINANCING AN EXISTING NOTE
Current Appraised Value of Property $1,200,000
New Maximum Outstanding Balance of Debt $1,080,000 90% Loan to Value (LTV)
ENTITY LOAN AMOUNT % OF LOAN SECURITY
■ New Bank First Trust Loan $ 600,000 50% 1st Lien
■ New CDC/SBA 504 Loan $ 480,000 40% 2nd Lien
■ Borrower Contribution (equity in property) $ 120,000 10%
Appraised Value of Property: $1,200,000
Like the traditional 504 Loan Program, the borrower may use its existing equity in the property for its 10% equity injection. The borrower is thus able to retain working capital in the business.
Should there be excess equity in the property, the small business can refinance other existing debt (including SBA Guaranteed Debt) or may use the excess equity (meaning, equity beyond the 10% minimum contribution) to obtain working capital for payment of recent or projected eligible business expenses. These expenses can include items such as rent, utilities, inventory and other business obligations.
Multiple refinancings of the original note ARE eligible. Borrowers must demonstrate that their loan is current and that they have successfully made all required payments under original or modified bank terms for the past twelve months. Such modifications of terms must have been entered into prior to October 12, 2011.
Do you have borrowers who could benefit from the new 504 Refinance Loan Program or instances where this program would benefit the bank? If yes, you can contact CDC New England for more information at 781-928-1100 or find one of our Business Development Officers in your area at www.newengland504.com
It’s important to remember to act fast; the program expires September 27, 2012, unless Congress acts to extend it.