504 Refinance Loan Program - The New Rule

The SBA 504 Refinance Rules have been published and a refinance is now possible with the 504 loan program.                                                    

504 Refinance Eligibility

1. SBA 504 Refinancing is now available to all eligible businesses with a balloon coming due. (FYI: The SBA recently updated this to include all eligible maturing loans not just those maturing by December 31, 2012).
   
2. Both the business and the debt to be refinanced must be at least 2 years old and 85% of the existing debt must have been used to finance eligible 504 assets (commercial real estate and "long life"equipment). 15% of the refinance amount could have been for other business purposes (working capital, inventory, etc.)
3. Business owners must have a minimum of 10% equity that can be equity in the real estate/building being financed or in other eligible collateral including any other 504 eligible asset, residences, other commercial property and equipment.
4. Existing "government backed" loans cannot be refinanced using the new program. (i.e. SBA 7a or USDA loans), but it may be possible to refinance your conventional first mortgage and re-subordinate an existing 504 second mortgage if you currently have a 504 financed project...or get a 3rd 504 loan for an expansion. (Please contact us at 1-800-710-9957o on how to do this).
   
5. Single purpose or special use buildings (hotels, mini storage facilities, etc) are technically eligible up to 90% ltv.
   
6. The SBA may further open the program up to those who could "substantially benefit" or show a great need for a refinance and possibly those looking for expansion money.
7. The SBA is reviewing a possible "cash out provision" possibly for business debt consolidation.
8. This is a temporary program and all loans must be approved by September 27, 2012.
9. Low loan to value loans are not eligible as the first mortgage cannot be less than 50% loan to value, however there may be other "non-SBA" programs available to you.
10. 504 refinance rates will be about 30 to 35 basis points higher than "regular" 504 rates. Initially the rate should be in the 6.50% range.
11. Refinances of larger loans for businesses with few employees will need to meet one of SBA's Public Policy or Community Development Goals in order to qualify, however, this should be possible for most businesses.

SBA Public Policy and Community Development Goals 

The SBA 504 loan program is (technically) a "Jobs Creation" or "Jobs Retention" program, but businesses that meet Public Policy or Community Development Goals are exempt from the "jobs requirements" and most businesses should be able to meet one of the goals.

The following types of businesses should be exempt from the Jobs Requirement:

1. Businesses that "improve, diversify or stabilize a local economy"
2. Minority owned (51% or more) and operated businesses. A minority is defined as most NON caucasians including borrowers of Hispanic and Asian origin.* (See below for full list)
3. Woman owned (51% or more) and operated businesses
4. Veteran owned (51% or more and especially service disabled) and operated businesses
5. Loans to businesses in communities affected by a military base closure (typically within commuting distance)
6. Loans to businesses in "Enterprise Zones"
7. Businesses that reduce their Energy consumption by 10%
8. Businesses in rural (possibly semi-rural) areas
9. Businesses that "stimulate other business development"
10. Businesses that "bring new income into a community"
11. Manufacturing firms in the North American Industry Classification System (NAICS) Sectors 31 to 33
12. Businesses in Labor Surplus Areas as defined by the Department of Labor 

If a business cannot meet one of these goals than they will have to create or retain the equivalent of 1 full-time job per $65,000 of 504 second mortgage. 

It is hoped that after a comment period that SBA will open the program up to allow for other needs such as business debt refinance, etc.  

*SBA Eligible Minority List:  

• Black Americans
• Hispanic Americans
• Persons with origins from India, Pakistan, Bangladesh, Sri Lanka, Bhutan, the Maldives Islands or Nepal
• Japanese Americans
• Chinese Americans (including Hong Kong)
• Koreans
• Taiwanese
• Vietnamese
• Persons from Laos, Cambodia (Kampuchea), The Philippines
• Native Americans (American Indians, Eskimos, Aleuts, or Native Hawaiians)
• Asian Pacific Americans (persons with origins from Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, U.S. Trust Territory of the Pacific Islands (Republic of Palau) and The Republic of the Marshall Islands, Federated States of Micronesia, the Commonwealth of the Northern Mariana Islands,
• Persons from Guam, Samoa, Macao, Fiji, Tonga, Kiribati, Tuvalu, or Nauru)
  and members of other groups designated from time to time by SBA.
  
  Being born in a country does not, by itself, suffice to make the birth country an individual's country of origin for purposes of being included within a designated group.

Primary Benefits of Refinancing with an SBA Loan

• SBA Loans are some of the only loans available to many businesses because of the government guarantee.
• SBA Loans have minimal equity requirements.
• SBA Loans do not have balloon payments.
• Both the 504 and the 7a offer long term amortizations for commercial real estate and "long life" equipment.
• 504 loans have a "below market" 20 year fixed rate second mortgage.

New Higher SBA Loan Limits

A new higher 504 loan limit of $5.5MM was also included in the legislation. This limit now allows even larger projects (possibly as high as $15MM) to be financed through the program. 

Conventional Commercial Mortgage Refinance (non SBA)

Conventional loans are still available for properties with more equity - typically at 20 to 40%. Feel free to 1-800-710-9957if you qualify for a conventional commercial mortgage refinance. 

SBA 504 Refinance Guidelines For Expanding Businesses

Expanding businesses can also refinance under the "old rules" as outlined below.    

The new, temporary guidelines allow debt refinances, but you are also eligible for a refinance if you are:  

1. planning a fairly major expansion of your commercial building or property
2. refinancing another property owned by the same business as part of an expansion.*

In all cases, the amount of the debt to be refinanced has to be 50% or less of the cost of the expansion. (See "new guidelines" below for additional details).   

Debt Refinance and Business Expansion

The 504 loan program allows a refinance and expansion as long as the debt to be refinanced does not exceed 50 percent of the projected expansion cost. (In other words, it needs to be a large expansion because the current debt cannot be more than 1/2 of what you are spending on the expansion).  

For example, if you currently owe $1,000,000 on your commercial building your expansion cost would have to be $2,000,000 to qualify for a 504 refinance. 

Please note that if you have more than 1 location the following provision in the new rules could help you.

*The debt being refinanced does not need to be for assets at the same location or for the same type of property as the project being financed as long as the operation at the other location has the same NAICS code as the operation at the Project location.

Essentially, this means that if your business has multiple locations - perhaps a warehouse and retail stores - and you were looking to expand one of them, you could use the 504 to pay off the debt on one property and expand the other. 

Of course, if you have more equity in your property - 30% or more - you may qualify conventional commercial refinance, so please get in touch if you would like to look at your options. 

 504 Refinance Requirements for Business Expansion

• The debt being refinanced must have been incurred to acquire land, construct a building or to purchase equipment and the assets acquired need to be eligible for financing under the 504 program.
• Existing debt must be collateralized by fixed assets.
• Existing debt was incurred for the benefit of the small business.
• Refinance must provide a substantial benefit to the borrower. “Substantial Benefit” is defined as the portion of the new installment amount attributable to the debt being refinanced and must be at least 10 percent less than the existing installment amount.
• The borrower must be current on all payments due on the existing debt for not less than 1 year preceding the date of the refinance.
• Costs essential to the refinance, such as prepayment penalties, financing fees or other refinancing costs, required by the original terms of the debt instrument, may be included in the debt refinance portion of a Project.
• SBA 504 Loan Fees apply
• The SBA 504 maximum project costs can go as high as $20 million+ if you have a manufacturing facility or if you Go Green.
• Refinancing enables you to take advantage of record low SBA 504 rates.

 SBA Alternatives - Small Business Capital

Small Business Administration lending programs are currently the best available financing for most small and mid-sized businesses and there is a lot of hope that the current bill will pass, but there will still be those who are ineligible for SBA financing.

These business owners may be eligible for "Asset-Based Lending" programs, which have proven to be a good alternative to SBA loans and could provide working capital for various business needs.

Asset-based programs available include:

• Accounts Receivable Financing
• Factoring
• Equipment Leasing
• Purchase Order Financing
• Contract Monetization for Service and Financial Contracts
• Merchant Credit Card Advance Lending
• Sale/Leasebacks

Some of these programs are available for A thru D credit, so please contact us at 1-800-710-9957 if you want to explore your options.

Other Non-SBA programs worth looking into include:

• Construction Project Financing
• Tenant Improvement Financing