Don't rule out refi for commercial space

Most business owners think they cannot refinance their building because it has gone down in value. The fact is most business owners who bought, using conventional financing, probably put down between 30 and 40 percent. Even if the building has declined in value, they most likely have at least 10-percent equity; and that is all you need to refinance using the Small Business Administration's 504 loan program.

In fact, if you have more than 10 percent equity, you can take out the excess in cash.

You can refinance more than one loan.

Say you have a conventional first and a line of credit. If the line was used to acquire substantially all fixed assets (85 percent 504-eligible assets) then it can be refinanced with the conventional loan.

In cases where the building does not have 10-percent equity, the borrower can use outside collateral. The SBA is willing to take a lien on your home or other fixed assets to cover the equity gap.

A few rules: the business must be at least two years old.

The existing loan cannot have a government guarantee attached to it (think SBA 7a, 504, and USDA loans).

You cannot have been more than 30 days late on a loan payment over the past 12 months.

The value is based on a new appraisal.

You must occupy at least 51 percent of your building.

Why go to all this trouble?

Companies facing balloons cannot get refinanced.

Companies with lines of credit are having them called and not renewed (Bank of America recently sent out letters to small business owners telling them their credit line would be terminated and it needed to be paid off within a few months).

Interest rates are at all-time lows. The latest effective interest rate for a 504 Refinance loan is 4.83 percent.

The 504 is a fixed and fully amortized 20 year loan.

Caveat: The 504 Refinance Program expires Sept. 27.

This is such a good program that SBA will probably renew it, but there is no guarantee of this.

The structure of a 504 loan is two-fold: 1) the bank makes a first deed of trust loan for 50 percent of the appraised value; and, 2) the CDC makes a second deed of trust loan for 40 percent of the appraised value.

Julie Phillip, For the Daily Facts

www.redlandsdailyfacts.com/business/ci_19759-488
Posted: 01/17/2012 12:33:31 PM PST
Julie R Phillip runs Phillip Financial in Redlands. She can be reached at 909-559-7338.

SBA Opens Temporary Refinancing Program to Real Estate Mortgages Maturing after December 2012

WASHINGTON, D.C. –Small business owners with eligible commercial real estate mortgages maturing after Dec. 31, 2012, will be able to secure more stable, long-term financing through the U.S. Small Business Administration’s temporary 504 refinancing program as a result of a change that will be published in The Federal Register by April 6.

In February, SBA implemented a temporary refinancing program enacted under the Small Business Jobs Act of 2010, which allowed small businesses facing maturing commercial real estate mortgages or balloon payments before Dec. 31, 2012, to refinance with an SBA 504 loan. The SBA change will lift the date limitation and will allow more small businesses to secure stable, long-term financing and avoid potential foreclosure on mortgages approved before and during the recession that were based on inflated real estate values.

“With the collapse of the real estate bubble, many small business owners have found themselves unable to refinance as a result of inflated real estate values at the time they took out their mortgage,” SBA Administrator Karen Mills said. “SBA’s temporary 504 refinancing program was first made available to those small businesses with the most immediate need. Today’s step opens this critical assistance to more small businesses, giving them the opportunity to restructure their debt and free up capital that will be essential to keeping their doors open and also their future ability to grow and create jobs.”

To be eligible for the temporary 504 refinancing program, a business must have been in operation for at least two years, the debt to be refinanced must be for owner-occupied real estate and have been incurred no less than two years prior to the date of application and the proceeds used for 504-eligible business expenses, and payments on that debt must be current for the last 12 months.

The refinancing loan is structured like SBA’s traditional 504 loan. Typically, a 504 project includes three elements: a loan (or first mortgage) secured with a senior lien from a private-sector lender covering 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.

Borrowers are able to refinance up to 90 percent of the current appraised property value or 100 percent of the outstanding mortgage, whichever is lower, plus eligible refinancing costs. Loan proceeds may not be used for other business expenses. Existing 504 projects and government-guaranteed loans are not eligible to be refinanced.

Under the Jobs Act, Congress authorized SBA to approve up to $15 billion in loans under this program ($7.5 billion in both fiscal years 2011 and 2012). Together with the first mortgage, this temporary program will provide up to $33.8 billion of total project financing. Additional fees charged to the borrower will cover the cost of this refinancing program and as a result no loan subsidy will be needed from taxpayer funds. The program is expected to benefit as many as 20,000 businesses.

SBA’s traditional 504 loan program is a long-term financing tool, designed to encourage economic development within a community. A 504 loan provides small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.

With publication in the Federal Register, which is expected by April 6, SBA will begin accepting applications from small business owners with mortgages maturing after Dec. 31, 2012. The program will be in effect through Sept. 27, 2012.
 

Commercial Real Estate Financing Soon Available Through SBA 504 Loan Program

McLEAN, VA – Starting February 28, 2011, the U.S. Small Business Administration's (SBA) 504 loan program will begin accepting applications for refinancing of existing qualified real estate debt for small business owners who are facing impending balloon payments before December 31, 2012.

In a press release today, SBA Administrator Mills pointed out “The economic downturn of recent years and the declining value of real estate have had a significant, negative impact on many small businesses with mortgages maturing within the next few years. As a result, even small businesses that are performing well and making their payments on time could face foreclosure because of the difficulties they face in refinancing and restructuring their mortgage debt. This temporary program is another tool SBA can provide to help these small businesses remain viable and protect jobs.”

Certified Development Companies, or CDCs, are the SBA’s conduit for providing 504 loans. CDCs have been anticipating a surge in demand knowing there are many small businesses in their communities that have been waiting for this refinancing option as a way to take advantage of lower interest rates and extend debt that has a maturing balloon payment. The ability to use a government-guaranteed 504 loan to refinance an existing commercial real estate debt was authorized under the Small Business Jobs Act, but it is a temporary program that will expire on September 27, 2012.

SBA 504 refinancing loans will be structured like a traditional 504 loan. A bank or third party lender provides at least 50% of the loan, the SBA – through a CDC –provides up to 40% of the loan and the small business borrower must provide equity of at least 10%. This equity may be drawn from the existing asset valuation, rather than new cash injection.

Borrowers will be able to refinance up to 90% of the current appraised property value or 100% of the outstanding mortgage, whichever is lower, plus eligible refinancing costs. Loan proceeds may not be used for other business expenses, and existing 504 projects and government-guaranteed loans are not eligible to be refinanced. SBA is expected to issue further regulations to fully implement the legislative directive to enable borrowers to use excess real estate equity for working capital in their businesses.

The CDC industry welcomes this new provision and sees it as a very important way to assist business owners across the country, save thousands of jobs and help the economy expand. The National Association of Development Companies (NADCO) – the trade association representing the nation’s CDCs - has been monitoring the release of these new SBA regulations very closely. NADCO President, Chris Crawford, indicated, “We have been receiving at least ten inquires a week since the refinance provision was announced as part of the Small Business Jobs Act in September 2010. Small businesses and banks have been clamoring to take advantage of this new, more affordable refinance option as a means to hold on to critical business properties. In many cases, this will mean saving a thriving business from closure if it could not refinance maturing debt. “

The new refinance program is only for businesses that can demonstrate that their loans are current and that they have successfully made all required payment over the last twelve months. There will also be a new, independent appraisal required for all projects. But even in the face of these requirements, SBA anticipates as many as 20,000 small businesses will be able to take advantage of these special refinancing loans. SBA has hired over 35 new loan processors to handle the increased workload at their Sacramento Loan Servicing Center.

Small business owners who wish to discuss their loan refinancing options should contact a Wakarusa Valley Development, Inc.