As published in Scotsman Guide's Commercial Edition, April 2012.
The recent modification of the Small Business Administration’s (SBA) 504 program — which allows the refinancing of existing debt — offers business owners the rare opportunity to withdraw equity from their properties for eligible business purposes. Commercial mortgage brokers should be aware of the requirements and benefits of this program to take advantage of it before it expires this September.
The SBA 504 program was established to offer small businesses access to long-term fixed-asset financing at favorable fixed long-term interest rates. Those benefits are now available to small businesses through the temporary 504 refinancing program. The interest rate for the 504 refinancing program was 5.04 percent this past January.
Under the program, a certified development company (CDC) provides up to 40 percent of the project’s cost and takes a secondary position to the bank loan. The amount of the bank loan must be at least as much as the 504 loan, however. The small business borrower must either have at least 10 percent existing equity in the property or must inject equity of at least 10 percent.
If the borrower has more than the required 10 percent of existing equity, then that equity can be used to obtain long-term working capital for the payment of eligible business expenses. The expenses can include items such as rent, utilities, inventory and other business commitments.
Commercial mortgage originators must be aware of the following basic requirements for qualifying for a 504 refinancing loan:
The small business must be for-profit and have a tangible net worth of no more than $15 million and an after-tax profit of no more than $5 million for the previous two years.
The small business must occupy a minimum of 51 percent of the property at the time of the refinance application.
The property must have been acquired at least two years ago with commercial debt.
The loan must be current and must not have any payments made more than 30 days after the due date under original or modified bank terms for the past 12 months. Such modifications of terms must have been entered prior to Oct. 12, 2011.
The project structure must be based on the current appraised value of the collateral.
Up to 90 percent of the current appraised property value may be refinanced.
Existing government-guaranteed loans are not eligible to be refinanced.
The SBA refinancing program also allows lenders to bring excessive commercial real estate loan-to-value (LTV) ratios under control, a benefit that’s important to lenders that exceeded regulatory LTV guidelines in the financial crisis. With the dismal prospects for a rebound in real estate values, many lenders that are exploring alternatives to bring LTV ratios in alignment with both regulatory guidelines and their own internal policies may find a solution in the SBA refinancing program.
The 504 refinancing program is temporary, however, and is set to expire on September 27 — unless Congress grants an extension. Commercial mortgage brokers are encouraged to familiarize themselves with its requirements and conditions to be able to advise their clients about its refinancing opportunities.
Barbara A. Vohryzek, president of Vohryzek & Co., is the regulatory affairs advisor for the National Association of Development Companies, the trade association for certified development companies. Prior to this, she was founder and executive director of California Statewide Certified Development Corp. Under her leadership, CSCDC originated 1,600 SBA 504
loans — $2 billion in real estate financing. Vohryzek serves on the board of Community Business Bank in California. Reach Vohryzek at (703) 748-2575 or Barbara@nadco.org.