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Temporary 504 Loan Refinancing for Eligible Small Business Assets Under the Jobs Act.
Market research shows that a large percentage of commercial mortgages outstanding are set to mature within the next few years, particularly those held by community banks. As real estate values have declined, however, even small businesses that are performing well and making their payments on time can have a hard time refinancing these loans and may need to restructure their debt. Also, public comments and the Small Business Jobs Act tour identified that access to working capital is currently the biggest credit gap in the marketplace. This is even true for businesses with equity in their properties.
Under the Small Business Jobs Act, the SBA has implemented a temporary program—authorized until September 27, 2012—allowing small businesses to refinance eligible fixed assets in its 504 program without requirement of an expansion. This program provides small businesses the opportunity to lock in long-term, stable financing, and finance eligible business expenses as well as protect jobs and hire additional workers. Key program changes were made in April 2011 and with the issuance of a final rule, effective October 12, 2011. These changes are highlighted in bold type.
Key Program Features
- SBA launched this temporary program on Feb. 17, 2011, and began accepting loan applications on February 28, 2011. The program will end on September 27, 2012.
- Beginning October 12, 2011 borrowers can finance up to 90 percent of the appraised value of available collateral, which could include fixed assets acceptable to SBA (for example: commercial or residential real property). This allows borrowers with more than 10 percent equity to be able to obtain additional proceeds to pay for eligible business expenses.
- In April, SBA expanded the program parameters by allowing any business with a commercial mortgage that is two or more years old to refinance its debt, regardless of maturity.
- The program is structured like SBA’s traditional 504 loan program: borrowers will work with third-party lending institutions and SBA-approved Certified Development Companies (CDCs), typically private, non-profit organizations to obtain financing, in a traditional 10%/50%/40% split. However, the program no longer requires the Third Party Lender to be 50 percent of the Project. The Third Party Lender amount must be equal to or greater than the SBA amount. This allows the small business to maximize the amount of long-term, low interest, fixed rate financing available.
- SBA estimates that as many as 8,000 businesses may participate in this program during the current fiscal year, which will provide up to $7.5 billion in SBA-guaranteed financing leading to total project financing of almost $17 billion.
- The program, which is completely separate from SBA’s traditional 504 program, is zero-subsidy, requiring no cost to the taxpayer: It will be funded entirely through additional fees assessed for refinancing projects.
Key Risk Mitigating Factors
- The definition of “Current” has been modified to allow more credit worthy businesses to qualify. The definition is now:
--In the last year, no payments more than 30 days past due according to original or modified terms (including deferments)
--Any modification must have been entered into in writing prior to October 12, 2011 (date of publication of Final Rule).
--SBA reserves the right to determine if a modified payment schedule would preclude refinancing under this program.
- SBA will perform full and thorough underwriting on all refinancing applications (i.e., there are no ‘delegated’ lenders).
- A new, independent appraisal will be required for all projects but is not necessary at time of loan approval. Project financing may need to be resized depending on the results of the independent appraisal.
- Government guaranteed loans are not eligible for this refinancing program.
SBA’s Permanent 504 Loan Program
SBA’s 504 loan program is a long-term financing tool designed to encourage economic development within a community. The 504 Program accomplishes this by providing small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.
Proceeds from 504 loans must be used for fixed asset projects, such as:
- The purchase of land, including existing buildings
- The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping
- The construction of new facilities or modernizing, renovating or converting existing facilities
- The purchase of long-term machinery and equipment
- Temporarily until September 27, 2011, refinancing of fixed assets without expansion and financing of eligible business expenses.
Typically, a 504 project includes three elements:
a loan (or first mortgage) secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a second mortgage secured with a junior lien from an SBA Certified Development Company (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business borrower.