By: Jim Noone, SBA Lending – Relationship Manager
The SBA introduced the 504 Refinance program in 2010 as part of the Jobs Act. It has taken more than 12 months for the benefits of this program to filter through to borrowers, however, the benefits are substantial for any business with a commercial mortgage.
Let’s start with eligibility. In order to be eligible for this program, the business must have at least one loan that was originally used for the purchase of fixed assets. Conventional commercial mortgages are the most basic example, but, any debt used to previously acquire fixed assets meets this threshold.
Once this has been established, we then look to the amount of the request. Under the 504 Refinance program, the borrower may request up to 90% funding based on the appraised value of the underlying fixed assets. The funds requested beyond the current outstanding balance of the mortgage can be used for “Eligible Business Expenses,” which is terminology for any working capital or capital expenditures of the business. These include salaries, utilities, improvements, and other loan repayments, including lines of credit.
For example, a business currently has a commercial property with an estimated appraised value of $2 million and an outstanding commercial mortgage balance of $1.5 million. The owner may also have a Line of Credit of $200K that has, over the last two years, been difficult to pay-off and has become permanent working capital.
Under the 504 Refinance Program, this borrower may request funding of $1.8 million (90% x $2 million). The use of funds would be $1.5 million to refinance the commercial mortgage, $200K to pay-off the Line of Credit, and $100K for general working capital. The structure of the request would be that either the existing mortgage lender or a new lender provides a 1st Mortgage of $1 million and SBA provides a 2nd Mortgage of $800K. The terms of the 1st Mortgage are a negotiation between borrower and lender while the terms of the 2nd Mortgage are typically a 20-year, fixed interest rate and 20 year amortization, without balloons. For borrowers that funded in March of 2012 in this program, the 20-year fixed rate on the SBA 2nd Mortgage was 4.79%.
Creative ways to use this program for lenders include working with borrowers that are looking to expand without having demonstrated the period of stabilization required by the bank credit department. By utilizing the 504 refinance program in conjunction with the traditional 504 program, the lender can shift the higher LTV exposure in their existing collateral into two first mortgage positions on the existing and expansion collateral. Doing this typically retains the relationship with the borrower while minimizing credit exposure to 50% LTV loans.
If you are a borrower or lender seeking more information on how use of this program may accomplish your goals, please fill-out our contact form at Contact Seedcopa and we will follow-up with you quickly.