June 2017
Commercial Lending
SBA 504 Refinancing: A Tale of Two Programs

This month marks the one-year anniversary of the return of the now permanent Small Business Administration (SBA) 504 Debt Refinancing Program that allows for the refinancing of commercial mortgages as well as other business debt and expenses without the requirement of expansion, which has historically been required.

SBA 504 Debt Refinancing ProgramGiven that, now is a good opportunity to review the two debt refinancing options – with and without expansion — available under the SBA 504 Loan Program to growing and expanding small business owners.

Debt Refinancing “Without Expansion”

Known as the permanent 504 Debt Refinancing Program, under this option small business owners can lighten their monthly debt payments and access equity trapped in commercial real estate holdings by refinancing conventional real estate loans.  Borrowers may also refinance eligible business operating expenses (cash-out option).

For borrowers that refinance only long-term fixed asset debt (no cash out), the maximum LTV is 90% of the fair market value of the eligible fixed asset(s).  Eligible fixed assets include land, buildings, machinery and equipment that were acquired, constructed or improved by a small business for use in its business operations.

Borrowers can also refinance eligible business operating expenses (cash-out option), however a maximum 85% LTV applies and the business operating expenses portion of the project may not exceed 25% of the value of the eligible fixed asset(s) securing the qualified debt.

Eligible business operating expenses includes salaries, rent, utilities, inventory or other obligations of the business that were incurred but not paid prior to the date of the refinance application or that will become due for payment within 18 months after the date of application.

To qualify, at least 85% of the original loan must have been used to acquire, construct or improve fixed assets.  The debt must have been incurred not less than two years prior to the date the refinance application is received by the SBA.  Additionally, the loan to be refinanced must be current on all payments (no payment more than 30 days past due) during the last 12 months.

An independent appraisal of the fair market value of the project assets and any additional assets offered as additional collateral must be provided. Appraisals are not required at time of application, but are required prior to closing and must be dated no earlier than 1 year prior to the date the application was approved by the SBA.

Existing SBA 504 loans and other government guaranteed loans are not eligible.

Debt Refinancing “With Expansion”

Debt refinancing “with expansion” has long been a permanent feature of the 504 Loan Program and remains a strong option for small business owners looking to grow and expand and reduce some debt at the same time.

Under this option, if an SBA 504 loan project involves expansion, then existing debt that does not exceed 50% of the cost of the expansion may be refinanced.  “Expansion” includes any project that involves the acquisition, construction or improvement of land, building or equipment for use by the small business.  The debt being refinanced will be added to the expansion cost to establish the total project costs.

Substantially all (85% or more) of the indebtedness should have been used to acquire land, land and building, construction of a building or to purchase equipment.  The assets acquired should have been eligible for financing under the 504 loan program.

The existing debt should be collateralized by fixed assets. The 504 eligible fixed assets collateralizing any debt to be refinanced, or relating to the portion of debt being refinanced in the case of a partial refinance, should also collateralize the 504 Loan.

An existing 504 loan may be refinanced. A 504 senior lender loan may not be refinanced with an SBA guaranteed loan.  An existing 7(a) loan may be refinanced in whole or in part only if the present lender is either unwilling or unable to modify the current payment schedule.

The total debt being refinanced may consist of one or more loans.  The debt refinancing does not need to be for assets at the same location or for the same type of property as the expansion project being financed as long as the operation at the other location has the same industry code as the operation at the project location.

The borrower must have been current on all payments due on the existing debt for not less than one year preceding the date of refinancing.  Costs essential to the refinancing, such as prepayment penalties, financing fees or other refinancing costs, required by the original terms of the debt instrument, may be included.

The financing must provide better terms or rate of interest than the existing indebtedness on the date of refinancing and at least a 10% reduction in the debt service on the existing loan.

The SBA 504 Loan Program provides up to 90% below-market, fixed interest rate financing with repayment terms up to 20 years for the purchase of commercial property and/or fixed heavy duty machinery and equipment.

504 loans are paired with private-sector commercial loans, providing up to $5 million of small business financing for standard and public policy projects and up to $5.5 million per green initiative and small manufacturer projects (these are SBA loan portions only; there is no limit on overall project dollar size).

For more information about SBA 504 Debt Refinancing options in Florida, contact a Florida First Capital Loan Officer or email us at info@ffcfc.com.  Phone: 850.681.3601 or toll-free at 888.320.5504.