504 refinancing option to expire on Sept. 27
North Bay lenders are lamenting the imminent expiration of the U.S. Small Business Administration’s temporary 504 refinance program, which allows a government-secured refinance of debt and reinvestment of equity.
The temporary program, launched by the Jumpstart Our Small Businesses (JOBS) Act of 2010, allows a small-business owner to refinance debt through the typical 504 loan structure used for financing property and other tangible assets: a 10 percent equity contribution from the borrower, a 40 percent, 20-year fixed-rate government loan and a 50 percent second mortgage from a second commercial lender. In combination, up to $10 million can be refinanced through the program.
Yet after a first year in which the SBA revised an underwriting procedure that many found prohibitively laborious, many lenders said that the looming sunset of the program on Sept. 27 has come too soon and at a time when more business borrowers could benefit.
“It’s kind of tragic,” said Jim Baird, CEO of Bay Area Development Co., a certified development company authorized to administer the federal portion of the 504 loan. “People keep saying, ‘How do we get capital out to Main Street?’ It’s a rare client in this program if we can’t save them thousands of dollars a month.”
With more than two weeks remaining before the end of the federal fiscal year, approximately 30 percent of the 504 loans performed in the United States have been for refinancing purposes, according to Mark Quinn, district director for the SBA region including the North Bay.
That proportion is similar for the North Bay. Out of 36 SBA 504 loans approved so far, 10 were under the refinancing model, according to Mr. Quinn. Four more approvals are expected by the end of the fiscal year.
The largest such recent loan was an $8.5 million refinancing for H2Hotel, LLC, which opened on Healdsburg Plaza in 2010, by Summit State Bank and Bay Area Development Co.
“In some cases, the refinance program was an attractive option,” said Cheryl Cinelli, senior commercial officer at Bank of Marin who worked on a $4.5 million refinancing for Napa-based manufacturer Lixit Corp. “If you lock in a long-term, low-rate loan and even take out cash, it’s an effective tool.”
Interest in the program has continued to increase as the sunset approaches, yet lenders noted that a backlog of applications will make it unlikely the SBA will complete any further loans.
“I’ve had to say to people, ‘There isn’t a chance,’” said Sherrill Stockton, senior vice president and SBA manager at Exchange Bank and chair of the technical issues committee of the National Association of Government Guaranteed Lenders. “The CDCs and the SBA are deluged with requests right now.”
In a recent memo, the SBA warned that lenders should submit no refinancing applications beyond Sept. 17. Meanwhile, efforts to continue the program have stalled in Congress, mired in early planning while lawmakers turn their attention toward issues that include the upcoming elections.
“I was the first person to testify about the importance of those programs and not letting them sunset,” said Brett Martinez, president and chief executive officer of Redwood Credit Union. He spoke to the U.S. House of Representatives on behalf of the Credit Union National Association in June. “It really had, and could continue to have, a significant impact. It was an amazing tool to help people, and a lot of people didn’t even know it was available.”
However, future legislation could reinstate the program, though no concrete measure has been proposed so far.
The impact of the program was enhanced by a historically low-interest-rate environment, driving down the cost of the commercial part of the loan. Commercial refinancing typically requires a down payment greater than 10 percent, a level of liquidity that might be a stretch for some businesses and a limiting factor in the amount of equity that a business owner could extract from a property.
As the sunset approaches, lenders agreed that a renewal could appeal to voters, as fees associated with the program are sufficient to cover the risk of default and shield taxpayers from a potential loss.
“It doesn’t cost anybody any money,” said Barbara Morrison, president and chief executive officer of TMC Financing, a CDC operating in the North Bay and California. “If you look at the percentage of our deals over the past month that are refi, you will see how the program has scaled.”
Recent materials from TMC reported more than $260 million in 504 refinance applications in its pipeline, a value that includes both loan components, potential cashouts and the 10 percent equity contribution required by the borrower. However, staff said that no more than 15 percent of those requests are expected to be approved before the deadline.
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