Commercial Magazine

Now’s the Time for SBA Refinancing

This government loan program can help small businesses weather the downturn

By Kurt Chambliss

The grave reality of the COVID-19 pandemic and economic downturn has created an urgent need for small businesses to save money on their mortgages. Now more than ever, business owners also require cash as they look for ways to reduce expenses and be smarter about their monthly spending.

The coronavirus outbreak has left businesses scrambling and desperate for relief. This environment presents the commercial mortgage broker with an ideal opportunity to help clients via the U.S. Small Business Administration (SBA) and its underused CDC/504 loan refinance program, as long as these borrowers aren’t using this option to refinance an existing SBA loan. The CDC/504 program provides a strong solution that can potentially save your clients thousands of dollars each month while unlocking the cash trapped in their equity. Today, with SBA refinance rates at an all-time low (they were below 3% for a 25-year fixed-term loan as of this past April), now is the time to help your clients refinance.

So, the timing is right, the rates are low, but why encourage your clients to use the CDC/504 program to refinance? The answer is straightforward: They’ll get the most bang for their buck. The CDC/504 loan is government-backed financing that comes with unbeatable terms. In March 2020, Congress also passed the Coronavirus Aid, Relief and Economic Security Act (CARES), which provides even more benefits for businesses that act fast to secure a CDC/504 loan.

One of the main benefits of the CDC/504 program is the cost. It offers below-market, fixed interest rates that are amortized over 25 years for up to 90% of the appraised value of commercial real estate.

Unlocking equity

Many small businesses right now are strapped for cash. Many are applying for new loans, but that’s unlikely to be enough. For many businesses, adding commercial mortgage debt through a new loan is simply not ideal or possible at the moment. Consolidating existing debt, refinancing and unlocking trapped equity is a more realistic possibility, however, and can help to remedy the problem.

With a CDC/504 cash-out refinance, your clients can borrow up to 85% of the appraised value of their property. Your clients can use a portion of the funds on qualified business expenses — including salaries, rent, utilities, inventory or other business obligations.

Under the CARES Act, the SBA will make payments for up to six months on new loans that fund by Sept. 27, 2020. Given the program’s funding timeline, however, borrowers will need to act fast to get federal relief. A certified development company (CDC) will need to submit the funding request to SBA by mid-August of this year. So, a borrower will need to complete the application by mid- to late July to qualify for the six-month relief period.

Aside from the immediate benefits from the federal government, CDC/504 loans provide some long-term advantages that make them a good option for borrowers. One of the main benefits of the CDC/504 program is the cost. It offers below-market, fixed interest rates that are amortized over 25 years for up to 90% of the appraised value of commercial real estate. These are long-term, fixed-rate loans with no balloon payments. With stable and predictable operating costs, your clients can accurately budget for years ahead.

Such stability also makes the program an attractive option for a small business looking to consolidate its existing debts. With the CDC/504 program, you can help your client combine all of their loans into one with a low long-term rate, allowing for increased cash flow and significant savings. 

Eligibility requirements

The CDC/504 program’s requirements are often misunderstood. As with a standard CDC/504 loan, most small- to medium-sized businesses that operate for profit in the U.S. qualify for the program. 

The business and its existing loan must be at least two years old and the borrower must have owned the business during those two years. At least 85% of the original mortgage must have been used for a CDC/504 eligible asset, such as owner-occupied real estate, land or equipment. The borrower also must be current on all payments for at least 12 months prior to the refinance application. It is important to note that an existing SBA loan is ineligible for CDC/504 refinancing.

The CDC/504 refinance mortgage is structured like the program’s traditional purchase loan. A lender, typically a bank, covers 50% of the cost through a first-lien mortgage. Up to 40% is covered by a second mortgage from a CDC. The remaining balance of at least 10% comes from the business owner’s equity. For startup businesses and single-purpose facilities, the equity contribution is normally 15%.

The CDC/504 program was established to help business owners who could not get stable, reasonably priced financing elsewhere. In doing so, business owners can conserve operating capital. The program’s structure makes it attractive to financial institutions that otherwise wouldn’t lend to the business. Take, for example, a scenario in which a small-business owner has a $1.5 million debt on their property that is appraised for $2 million and needs $200,000 cash for business needs.

In this case, the owner’s new financing would most likely include a $1 million first mortgage from a bank and a $700,000 second mortgage from a CDC. The existing equity would cover the borrower’s downpayment, while the remainder of the available equity would be converted to cash. With the 25-year term and below-market, fixed-rate pricing of the CDC/504 loan, your client can enjoy monthly savings and increased cash flow.

CDC/504 refinance loans have been available for years, but the program is underused. In fiscal year 2019, for instance, the SBA approved 166 refinances that totaled $154.8 million. Mortgage brokers and borrowers have stayed away from this option for a few reasons. 

First, compared to the broader CDC/504 purchase loan program, the refinance program is not as well-known. Second, there’s an incorrect perception that commercial mortgage refinancing is complex and time-consuming. In fact, the typical time it takes to complete a CDC/504 refinance deal is comparable to that of a conventional loan. There are only a few more forms and a bit more document research to be done on the existing debts being refinanced.

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The CDC/504 refinance program is a powerful tool and a fantastic opportunity for commercial mortgage brokers to expand their product offerings and help small-business clients during this tumultuous time. It is time to use the CDC/504 refinance program to its full advantage, help your clients access trapped equity and capitalize on what the program offers.


  • Kurt Chambliss

    Kurt Chambliss is executive vice president of TMC Financing, a certified development company (CDC) that has provided real estate financing in Arizona, California, Nevada and Oregon for more than 40 years. TMC Financing offers commercial real estate buyers up to 90% financing by utilizing the U.S. Small Business Administration's CDC/504 loan program. TMC is the No. 1 CDC in the nation, providing more than $14 billion in financing for more than 7,000 businesses.

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