For the first time, the U.S. Small Business Administration is allowing for the temporary extension of the 504 loan program to allow refinancing of existing commercial real estate debt.
The administration released regulations regarding the SBA 504 Debt Refinance Program outlined in the Small Business Jobs Act of 2010. Because 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.
“There is no doubt there is need for this program,” said Barbara Morrison, chief executive officer of TMC Development, a certified SBA development company. “We are getting calls every day from banks asking when we could start this program.”
Under the Jobs Act, the SBA is implementing this temporary program through Sept. 27, 2012, which allows small businesses to refinance eligible fixed assets in its 504 program without requirement of an expansion, as is the case with typical 504 loans. The SBA intends this program to provide small businesses the opportunity to lock in long-term, stable financing, as well as protect jobs.
The SBA will start accepting loan applications Feb. 28. The program will end Sept. 27, 2012.
“It is very difficult to know exactly what the demand is going to be,” said Ms. Morrison.
The SBA decided to limit the applications to borrowers most at risk, or those whose loans are coming due before Dec. 31, 2012.
“They are in a tough spot,” she said.
Most were five-year loans on properties purchased in 2006 or 2007, at the height of pricing.
If someone bought a building for $5 million, a conventional loan is 75 loan to value, or $3.5 million.
“In a normal economy, when they go to the bank and need to rewrite the note it would be a no brainer but now the bank has to do a new appraisal,” said Ms. Morrison.
Even if the value only decreased 15 percent, that brings it to $4.2 million, and 75 percent of that is $3.1 million that can be refinanced. On a $3.7 million loan, that business has to come up with a check for $600,000.
But with the SBA regulations, 90 percent can be lent and the mortgage rates can be lowered.
“This is important because if you put a business out on the street and they have to move because they can’t keep the loan in place, you are jeopardizing the business. And the ripple effect is that with this one commercial default, you may impact jobs and a lot of residential foreclosures could come out of it,” Ms. Morrison said.
Borrowers can finance up to 90 percent of the current appraised property value, or 100 percent of the outstanding principal, whichever is lower, plus 504 eligible refinancing costs. SBA will initially open the program only to businesses with immediate need. Priority will be on those businesses potentially at risk because they face loan maturity or balloon payments before Dec. 31, 2012. SBA will later revisit the program parameters, and may open the program to businesses with later balloon payments or that can demonstrate need in other ways.
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, typically private, non-profit organizations to obtain financing, in a traditional 10 percent, 50 percent, 40 percent split.
“We are optimistic we are going to be able help some of the small businesses that are in need with this program,” said Larry Nuffer, spokesman for CDC Small Business Finance. “We were all expecting this to come in March and all of a sudden this thing drops and it is a little more restriced than most people thought but we feel they re focusing on the small businesses most in need, those having balloon payments coming due by the end of 2012.”
The SBA estimates that as many as 20,000 businesses may ultimately participate in this program, which could provide up to $15 billion in SBA-guaranteed financing leading to total project financing of over $30 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.
Applicants must demonstrate that their loans are current and that they have successfully made all required payments in the last year. A new, independent appraisal will be required for all projects. SBA will perform full and thorough underwriting on all refinancing applications.
“I think it is the most significant change in SBA programs since the begining of the recession,” said Ms. Morrison. “Because the fee waivers helped new borrowers which is not insignificant, but this is helping small businesses get out from under debt they already have.”
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