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.

ont-family: Times New Roman; color: #000000;”>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.

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Under the Small Business Jobs Act, the SBA will implement a temporary program—authorized until Sept. 27, 2012—allowing small businesses to refinance eligible fixed assets in its 504 program without requirement of an expansion, as is the case with typical 504 loans. This program will provide small businesses the opportunity to lock in long-term, stable financing, as well as protect jobs.

Key Program Features

• SBA will launch this temporary program on Feb. 17, 2011 and will begin accepting loan applications on Feb. 28, 2011. The program will end on September 27, 2012.
• 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 (CDCs), typically private, non-profit organizations to obtain financing, in a traditional 10%/50%/40% split.
• SBA estimates that as many as 20,000 businesses may ultimately participate in this program, which will 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.

Key Risk Mitigating Factors

• 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.e., there are no ‘delegated’ lenders).
• Initially, the first mortgage loans on existing 504 projects are not eligible, and “cash out” refinancings are not permitted. SBA may later revisit these restrictions. In addition, no government guaranteed loan is eligible for this refinancing program.

SBA’s 504 Loan Program

SBA’s 504 loan program is a long-term financing tool, designed to encourage economic development within a community. The 504 Program accomplishes this by providing small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.

Proceeds from 504 loans must be used for fixed asset projects, such as:

• The purchase of land, including existing buildings
• The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping
• The construction of new facilities or modernizing, renovating or converting existing facilities
• The purchase of long-term machinery and equipment

Typically, a 504 project includes three elements:

• A loan (or first mortgage) secured with a senior lien from a private-sector lender covering up to 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
• A contribution of at least 10 percent equity from the small business borrower.