News
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.
More Small Businesses Now Eligible for Long-Term Financing with SBA 504 Loans
A number of very substantial benefits for America’s small businesses were incorporated into the Small Business Jobs and Credit Act of 2010, recently passed in Congress. Included in the legislation were major enhancements to the SBA 504 loan program, an important U.S. Small Business Administration financing program. SBA 504 loans are long-term, government-guaranteed loans designed for small businesses to finance the purchase, construction or renovation of commercial real estate and the purchase of long-term capital assets.
As a result of the legislation, many more small business owners across the country now qualify to receive SBA 504 loans. The net worth for companies to be eligible for an SBA 504 loan was increased, maximum loan size was raised and refinancing of existing debt was also approved.
Among the most important benefits included in the Small Business Jobs and Credit Act of 2010 is an extension of the fee relief for SBA 504 loans. This fee waiver was first enacted in February 2009 as part of the American Recovery and Reinvestment Recovery Act. An additional $505 million has been allocated to fund SBA loan fees through December 31, 2010 saving borrowers many thousands of dollars.
Maximum loan amounts were also permanently increased to a range of $5 to $5.5 million from a previous maximum range of $1.5 to $4 million. Larger projects are now eligible for 504 loans and borrowers who already have loans with the SBA can now return for additional funding.
There was also an increase in the business size standard to be eligible for an SBA 504 loan. Businesses with a tangible net worth of $15 million and 2-year average net income after Federal income tax of $5 million, are now be eligible to apply for SBA 504 financing opening the door to many more small business owners across the country.
Perhaps one of the most beneficial enhancements to the SBA 504 loan program is a temporary two-year program for refinancing existing small business commercial debt. Small business owners holding commercial real-estate loans with undesirable rates will have the opportunity to refinance these loans using the SBA 504 loan program. This will be a boon for small businesses that are having difficulty keeping current on existing high-interest loans since SBA 504 loans are currently available at extremely attractive interest rates. Businesses will be able to remain in their facilities while lenders are not left holding vacant real estate.
SBA 504 loans are typically used by small businesses needing more operating space or by businesses that have lost their leases and decide to invest in their own facilities. Still others want to construct or retrofit facilities to incorporate energy efficient technologies to decrease operating expenses. Businesses needing to invest in capital-intensive equipment and machinery also look to the SBA 504 loan for funding. Small business owners definitely see the advantage of the low down payment which is typically only 10%. The hidden value to our economy is that all SBA 504 loan recipients are also adding jobs in their communities.
Certified Development Companies (e.g.Wakarusa Valley Development, Inc.) are the SBA’s conduit for providing 504 loans on Main Street. They are ready and waiting for the anticipated increase in demand this new legislation will generate. CDCs know that many small business borrowers will want to take advantage of these long-term, fixed, low interest rate loans now. Chris Crawford, President of NADCO, the trade association for the nation's CDCs pointed out, "The bottom line is that more small businesses now have an opportunity to invest in their own facilities or expand existing facilities using SBA 504 financing. At a time when the commercial real estate market is depressed and property is more affordable, this is great news for many small business owners.”
SBA 504 Loan Interest Rate Drops Below 5% for Small Business Borrowers
The Small Business Administration's (SBA) 504 loan program is providing long-term, fixed rate financing for the purchase of commercial real estate at one of the lowest interest rates since the program's inception. The SBA's lending partners, Certified Development Companies (CDCs) are busy working with small business borrowers who are taking advantage of this current low interest rate to purchase or build new facilities.
NADCO, the trade association for the nation's Certified Development Companies (CDCs), reports that the interest rate for a 20-year SBA 504 loan continued to fall to a low of 4.93% this month. The August bond sale to investors that funded SBA loans was sold at a rate of 3.52%. This low sale price resulted in an effective interest rate – including fees – of only 4.93% for borrowers this month. This interest rate is one of the lowest since the program began in 1986.
The Small Business Administration's (SBA) 504 loan program provides long-term, fixed rate financing for commercial real estate, and has funded nearly $60 billion in loans to growing small businesses over the past 24 years. Not only are the interest rates low right now, but one best aspects of an SBA 504 loan is the low down payment required by a borrower. The down payment is typically only 10%. CDCs across the country are busy helping small business borrowers who are taking advantage of these record low interest rates to purchase, build or expand their own facilities.
Recent loan data has shown that a large percentage of SBA 504 borrowers are professional practices. The greatest concentration of loans has been to physicians, dentists, veterinarians, lawyers and accountants. Chris Crawford, NADCO President, observed, “It’s not surprising that accountants and lawyers recognize the benefits of SBA 504 loans, but it’s gratifying to see so many professionals also realizing that owning their own building to fix their business occupancy costs is a very savvy financial move. More business owners would be wise to make similar investments.”
Jean Wojtowicz, Chair of the NADCO board and Executive Director of Indiana Statewide Certified Development Corporation, observed that " a commercial loan below 5% is an incredible rate for 20-year, fixed-rate money. When you consider the drop in the price of commercial real estate and the inventory currently on the market, small businesses have a real opportunity to expand or buy their first building right now.”
Chris Crawford went on to say, "There is just no better deal available for the purchase of real estate or for expansion of existing facilities. I urge any business owner thinking about expanding to call their banker and ask about the SBA 504 program today. Our CDC members are working hard with our bank partners, and we have money available for sound, small business real estate projects," Crawford said
About the National Association of Development Companies (NADCO):
Created in 1981, the National Association of Development Companies is the trade association for America’s Certified Development Companies (CDCs). Certified by the U.S. Small Business Administration, CDCs are community-based economic development organizations that serve their local communities and states, and are dedicated to the promotion of small business expansion and job creation through SBA’s 504 Loan Program. In addition to the 504 program, many CDCs also provide small businesses with access to other Federal, state and local economic development loan programs. These programs provide both long and short term funding for borrowers.
Based in the suburbs of Washington, D.C., NADCO provides legislative and regulatory support for the 504 Loan Program on behalf of CDCs, the program’s lending partners (including first mortgage lenders, attorneys and others allied to the industry), and 504 small business borrowers. For more information, please call (703) 748-2575 or visit www.nadco.org.
Update: SBA Lending Legislation
The Senate took some action on small business legislation in the final days of June.
First, H.R. 4213 (the "Extender Bill") has already passed the House, but the Senate has failed to bring it to a vote. This is the bill that continues fee relief for the 504 and 7(a) programs and it also continues the 90% guarantee for 7(a) loans. NADCO, our trade organization, and many other groups, have been fighting for this portion of HR 4213. This is a large bill that includes many issues including unemployment. SBA program funding is a very small part of the legislation. At this time, there are no further negotiations occuring between the two parties in the Senate. Clearly,the SBA 504 loan program is running out of time on this funding need and the August recess is rapidly approaching. There are only three work weeks left, and other important issues are expected to take at least two of those weeks, leaving much to be done in the final week of July.
NADCO expects to discuss this funding situation with SBA managers to determine what to suggest to CDCs as they continue to enter loan packages in the SBA loan queue. Things are dragging out longer than anyone anticipated, and there is no clear timetable on when Congress might pass an Extender bill. It will become problematic for CDCs to continue recommending the holding of loan packages in the queue for borrowers if Congress goes on recess in August prior to voting on continuing SBA fee relief.
Second, the Senate “Jobs 3” bill now includes the former S. 2869, the bill crafted by the Senate Small Business Committee that includes the larger $5 million debenture, the temporary refinancing proposal crafted by NADCO, and a two year extension for the 504 first mortgage pooling guarantee program authorized by the Stimulus bill in February 2009. This language is identical to HR 4302, for which many NADCO members worked hard to gain co-sponsorship support from Members of the House and succeed in adding more than sixty members.
None of this language was included in the final House "Jobs 3" bill, as it was opposed by the House Small Business Committee leadership Thus, should this bill pass, the conference between the House and Senate becomes all-important for the proposed changes to the loan programs.
SBA Stimulus Package Highlights
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) (P.L. 111-5). Section 501 of the Recovery Act authorizes SBA to reduce or eliminate certain fees on 7(a) and 504 loans and Section 502 of the Recovery Act authorizes SBA to guarantee up to 90 percent of a 7(a) loan except for SBA Express, which remains at a 50 percent guaranty.
The Recovery Act does not change the submission process for the 7(a) and 504 Loan Programs. As before, Wakarusa Valley Development stands ready to assist you. Give us a call or send an email, whether it’s to submit a 504 Application, package a 7(a) Guaranty Loan, or simply answer any questions you may have regarding these changes.
7(a) LOAN PROGRAM
Guaranty Percentage and Loan Amount
As of March 16, 2009, a Lender may request up to a 90 percent guaranty for a 7(a) loan submitted under the following programs:
Loan Program Max Loan Amount Max Guarantee Amount
Standard 7(a) $2,000,000 $1,500,000
CLP $2,000,000 $1,500,000
PLP $2,000,000 $1,500,000
Lender Advantage $ 350,000 $ 315,000
Community Express $ 250,000 $ 225,000
Patriot Express $ 500,000 $ 450,000
Export Express $ 250,000 $ 225,000
Gulf Opportunity $ 150,000 $ 135,000
The Recovery Act did not change the maximum SBA guaranteed amount which remains at $1,500,000. Therefore, for those loan programs that have a maximum loan amount greater than $500,000 (Standard 7(a), CLP, and PLP), in order for the loan to receive a 90 percent guaranty, the loan amount cannot exceed $1,666,666 ($1,500,000 divided by 90 percent).
For loans greater than $1,666,666, the maximum guaranty will be calculated as follows: $1,500,000 (SBA guaranteed amount) divided by the loan amount rounded down to the second decimal. For example, if the loan amount is $1,680,000, then the guaranty percentage would be $1,500,000 divided by $1,680,000, which equals 89.2857 percent, rounded down to 89.28 percent.
For loans to borrowers with existing SBA-guaranteed loans, the new loan will also have a guaranty percentage less than 90 percent when necessary to comply with the Small Business Act’s limitation of no more than $1,500,000 in guaranteed amount to one borrower (including affiliates). (Section 7(a)(2)(D)(3) of the Small Business Act provides a higher maximum guaranteed amount for certain loans used for export purposes.)
Fee Eliminations
7(a) Loan Guarantee Fee Eliminations: For 7(a) loans approved by SBA on or after February 17, 2009, SBA will temporarily eliminate the Small Business Act section 7(a)(18)(A) fees (upfront guaranty fees) for all eligible loans, including those made with higher SBA guarantees (up to 90%) as provided in section 502 of the Recovery Act. For eligible loans approved between February 17, 2009 and March 16, 2009, the Agency will make funds available to refund payments for these fees. The Agency is developing a refund mechanism. SBA expects to be able to begin issuing refunds by approximately May 1, 2009. If borrowers have already paid lenders for the fee on eligible loans, lenders must reimburse the borrowers from the SBA refund.
Consistent with the prioritization for fee eliminations or reductions in the Recovery Act, the on-going guaranty fee set forth in section 7(a)(23) of the Small Business Act will continue to apply. In addition, SBA’s ¼ point guaranty fee set forth in 13 CFR 120.220(a) for loans with maturities of 12 months or less will continue to apply.
504 DEVELOPMENT COMPANY PROGRAM
Fee Eliminations
504 Development Company Program Fee Eliminations: For eligible loans approved through the Agency’s section 504 Development Company Program on or after February 17, 2009, SBA will temporarily eliminate two program fees: 1) Third-Party Participation Fees (Small Business Investment Act Section 503(d)(2) fees codified at 13 CFR 120.972); and 2) CDC Processing Fees (13 CFR Section 120.971(a)(1) fees). Consistent with the Recovery Act’s temporary elimination of CDC Processing Fees, CDCs will no longer be allowed to collect deposits from small business applicants that would have gone towards payment of the CDC Processing Fee upon loan approval under 13 CFR 120.935. SBA will reimburse the CDCs for the waived CDC Processing Fees.
SBA will pay CDCs two-thirds of the estimated CDC Processing Fee at the time of loan approval by SBA or upon the issuance of a loan number for a loan approved under the Premier Certified Lenders Program. The remainder of the fee will be paid immediately following debenture funding and will be equal to 1.5% of net debenture proceeds for which a CDC does not collect the CDC Processing Fee, minus the amount previously paid. If a borrower has already paid a CDC for the fee, the CDC must reimburse the borrower from the SBA refund. SBA will not permit CDCs to cancel loans approved by SBA prior to February 17th, 2009 and resubmit them in order to qualify for the reimbursement of the processing fee. If the Participation Fee has already been paid to SBA on an eligible loan, SBA will refund the fee.
Expiration Date for Both 7(a) and 504 Loan Programs
The elimination of 7(a) and 504 fees and increased guaranty percentage of up to 90 percent will be available until the aggregate dollar amount of 7(a) and 504 loans made under this authority exhausts the funds dedicated to that purpose.
Depending on loan volume in the 7(a) and 504 programs, SBA estimates that it will be able to eliminate upfront guarantee fees and that the increased guaranty percentage will be available through approximately December 31, 2009.
For more information regarding the 2009 Recovery Act, please click here.
SBA Announces New Energy Efficiency Public Policy Goals for 504 Loans
The SBA recently added the following three energy efficiency Public Policy Goals:
1) reduction of energy consumption by at least 10%
2) increased use of sustainable design, including designs that reduce the use of greenhouse gas emitting fossil fuels, or low-impact design to produce buildings that reduce the use of non-renewable resources and minimize environmental impact, or
3) plant, equipment and process upgrades of renewable energy sources such as the small-scale production of energy for individual buildings or communities consumption, commonly known as micropower, or renewable fuels producers including biodiesel and ethanol producers.
Projects meeting any of these can go to $2 Million without creating or retaining jobs, as with other Public Policy Goals, as long as the CDC portfolio average is $50,000 as required. In addition, projects that reduce energy consumption by at least 10% or generate renewable energy or renewable fuels are eligible for up to $4 Million in 504 financing.
Karen Mills Nominated to Head SBA
On December 19, President-elect Barack Obama designated Karen Gordon Mills as his pick for the next administrator of the U.S. Small Business Administration. Mills’ nomination is subject to Senate confirmation.
Mills is a founding partner of the New York-based equity firm Solera Capital and the chairwoman of the Maine Governor’s Council on Competitiveness and the Economy. She is also president of the MMP Group in Brunswick, Maine, and she serves on the boards of directors for the Maine Technology Institute and the Maine chapter of the Nature Conservancy.
“I’m delighted that Karen Mills has been designated by President-elect Obama to be the next SBA administrator,” said Shawne McGibbon, acting chief counsel for advocacy. “As a venture capitalist, Karen clearly understands the need to lower the regulatory hurdles growing small businesses face. She also knows how important small businesses are to the economy, especially in their roles as innovators and job creators. I look forward to working with her and her team to advance the small business agenda in Washington.”
Mills graduated magna cum laude from Radcliffe College, part of Harvard University, with a degree in economics. She received her master’s degree from Harvard Business School in 1977.
Businesses Find Cheap Capital in SBA Mortgages
Wall Street Journal, By COLLEEN DEBAISE
FOR YEARS, A LITTLE-KNOWN Small Business Administration lending program known as the 504 has stood in the shadows of the agency's flagship loan program, the 7(a).
But now, as banks tighten their lending practices and commercial office space becomes cheaper in some markets, a growing number of business owners are turning to 504 loans. These loans can be used to purchase business real estate or fixed assets (such as heavy equipment or machinery). And, because 504s are backed by the government, they're typically easier and cheaper to secure than conventional commercial mortgages.