New SBA 504 Refinancing Program Benefits Small Businesses and Banks

By: Jean Wojtowicz, President Cambridge Capital Management Corp. Commercial real estate lenders don't have to look far to see the impact of the recession on their local small business community. Lenders' loan-to-value ratios have increased as appraisals on collateral property declined for a few years and now are slow to rebound. Fortunately, help is also nearby: recent revisions to the U.S. Small Business Administration's (SBA) 504 refinancing program allow an unusual -- but time-limited -- opportunity for lenders to bring their owner-occupied commercial real estate portfolio back into their bank's comfort zone, comply with federal loan-to-value regulations and provide an important tool for lenders to offer their small business clients. Can using the SBA 504 program in a different way measurably improve local businesses? The 504 program is historically a strong performer. It allows small businesses to take advantage of long term, fixed rate loans to refinance their high 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. The SBA's new wrinkle on the program allows businesses to use 504 loans to refinance existing debt. Banks making this type of loan can offer their borrowers excellent rates and terms, and also offload 40% of the risk and reduce their loan-to-value ratio. SBA's regulations for the 504 refinancing program allow the loans to be structured like traditional 504 loans. With a traditional 504 loan, a bank provides up to 50% of the project cost and holds the first lien position. A Certified Development Company (CDC) provides up to 40% 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. There are virtually no restrictions on the bank's loan with respect to structure or pricing. 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. There is no maximum project size for a 504 loan, but the refinance loan itself is limited to $5 million and increases to $5.5 million for eligible manufacturing or projects that incorporate energy saving technologies. The borrower must have owned the property for at least two years and acquired it with commercial debt, must occupy at least 51% of the property, be for-profit and have a tangible net worth of less than $15 million and after-tax profit of less than $5 million for the previous two years. If the original note has been refinanced several times, the 504 refinance loan could still be granted. 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. And the loan may refinance 90% of the existing eligible debt. Do you have borrowers who could benefit from the new 504 Refinance Loan Program or instances where this program would benefit the bank? You may visit NADCO's website at www.nadco.org for more details or contact your local CDC to get more information. It is important to remember to act fast; the 504 refinancing option expires September 27, 2012 unless Congress acts to extend it. This loan modification might help you improve the health of your commercial loan portfolio and your local business borrowers.