Business owners with a conventional commercial property mortgage can finally take advantage of the low fixed rates on government guaranteed loans through the Small Business Administration (SBA) 504 Refinancing Program. After months of waiting for regulations to be finalized, the SBA began accepting refinance applications through the loan program in late June for eligible fixed assets and business expenses.
Last year, Congress doubled the lending authorization of the SBA through the 504 loan program to $15B. The agency can now approve an additional $7.5B in loans under the 504 Debt Refinancing Program on top of the $7.5B allowed through the regular 504 Loan Program.
Before driving down to your local SBA lender (or going to Google to seek out one) you should arm yourself with a few bits of information about the SBA 504 Refinancing Program:
The SBA 504 Program can refinance up to 90% loan-to-value; 75% on cash-out loans
A borrower can leverage up to 90 percent of the value of a commercial property to pay off qualifying debt. An SBA 504 loan is made up of a first and a second lien. An SBA lender provides up to 50 percentof the value of the property on the first loan and a non-profit organization authorized by the SBA called a Certified Development Company (CDC) funds the government guaranteed second loan up to40 percent.The refinance can include cash-out to cover eligible business operating expenses such as salaries, rent, utilities, inventory, or other obligations of the businessbut the maximum loan-to-value would be lowered to 75 percent.
Qualified debt must be at least two-years old; borrower must own business during that time
For the loan to be eligible to be refinanced it must have been in existence for at least two years prior to the date of application. The borrower also must have operated the business for the entire two-year period, proven by submitting financial statements at the time of application. If the ownership has changed (either partially or fully) within that time, then the SBA considers it a new business thus disqualifying the debt under the program rules.
Borrower must be current on payments for at least one year
The SBA requires proof that there were no late payments on the commercial loan being refinanced within the last 12 months from the date of application. This means that no payment can be more than 30 days past due.
No SBA or USDA loans are eligible for refinancing
The SBA 504 Refinance Program cannot be used to refinance an existing government guaranteed loan. Only conventional loans are eligible, like a bank loan or CMBS.
Certain CMBS borrowers should think about SBA 504 when refinancing
This option can be used to refinance maturing CMBS debt if it comes under the umbrella of SBA 504 eligibility based on asset type and loan amount. Loans below $15MM on hotels and self-storage facilities are eligible for the SBA 504 Refinance Program. According to data from Trepp LLC, $145B in CMBS loans will mature over the next 12 months. Almost $12B of that will be eligible for SBA 504 refinance based on the above eligible property types and loan sizes.
Work with an experienced lender
For the SBA 504 Refinancing Program to remain available it must stay at zero subsidy.Meaningno tax dollars can go to fund the program. Lendershave to make good deals so that the program can remain self-sustaining and supported by the fees the SBA collects. For this to happen, borrowers should work with a credible lender. During the Great Recession, many banks and third party lenders exited the SBA 504 secondary market creating a void. There are now only a handful of experienced players to satisfy what will become a massive demand.