The Small Business Administration (SBA) has published the final rule for debt refinancing without expansion under the 504 loan program. The final rule is effective June 6, 2018.
This final rule includes revisions to the interim final rule published on May 25, 2016, with respect to the definition of qualified debt, the requirements related to eligible business expenses, the refinancing of projects involving single or limited use properties and the disbursement period.
Here are highlights of the changes:
Definition of Qualified Debt
Interim Rule: A qualified debt is defined, among other things, as a commercial loan incurred not less than 2 years before the date of the 504 Loan application. If the loan was refinanced with a new promissory note within that 2-year period, then the debt is not considered qualified debt.
Final Rule: The SBA has revised the criterion to allow certain loans refinanced within the 2 years prior to the date of application to be eligible as the same “indebtedness” if the effect of the refinancing was to extend the maturity date without advancing any additional proceeds, and the collateral for the most recent loan includes, at a minimum, the same eligible fixed asset(s) that served as collateral for the former loan that was refinanced. Other terms of the most recent loan, such as interest rate and the addition of other collateral, may be different.
The SBA emphasizes that it reserves the right to determine, at its discretion on a loan by-loan basis, whether the terms of any modification or refinancing are consistent with prudent lending standards.
Modified Payments within 1-Year of 504 Loan Application
Interim Rule: “Current on all payments due” means that no payment was more than 30 days past due from either the original payment terms or modified payment terms, including deferments, agreed to in writing by the borrower and the lender of the existing debt no less than 1 year prior to the date of the 504 Loan application.
Final Rule: Does not change the requirements of the interim rule, but adds that modifications to an existing promissory note or refinancing with a new promissory note within 1 year of the date of the 504 Loan application are permitted if the modification or refinancing extends the maturity date, including any balloon payment; the borrower has been current on all payments due during the 1-year period, both before and after the modification or refinancing; there are no deferments of any payments during the 1-year period; and no advance of additional funds has been made to borrower other than the closing costs of the modification or refinancing.
As with a refinancing, the modification may change other terms of the loan such as the interest rate or amortization schedule. Again, the SBA expressly reserves the right to determine, at its discretion on a loan-by-loan basis, whether refinanced or modified repayment terms satisfy prudent lending standards.
Loan-to-Value Limitations for Qualified Debt and Eligible Business Expenses
The final rule codifies the interim rule’s 90% maximum loan-to-value for qualified debt-only projects (no cash out).
For debt refinance projects financing eligible business expenses (cash out option), the final rule codifies the 85% maximum loan-to-value and 20% cap requirement (the interim rule had a 75% maximum loan-to-value and a 25% cap).
Business Operating Expenses
Interim Rule: Eligible business expenses are “other secured debt” or “business operating expenses” incurred but not paid prior to the date of the 504 loan application or that will become due within 18 months after application.
Final Rule: Eliminates “other secured debt”; limits business expenses to “operating expenses” and not capital expenditures; and continues limitation of debt to business credit card debt, but adds business line of credit debt.
The SBA revised the definition of eligible business expenses to allow the financing of “any other expenses of the business that are not capital expenditures”. SBA will use IRS guidelines for this determination.
The SBA also reaffirmed its recent policy guidance on business credit card debt (credit card debt may be included as an eligible business expense if the credit card is issued in the name of the applicant small business and the applicant certifies that the credit card debt being refinanced was incurred exclusively for business related purposes) and incorporated that in this final rule.
Also, business lines of credit may be included as an eligible business expense if the business line of credit satisfies the same requirements as credit card debt. For debt incurred with a credit card or business line of credit, the proceeds of the debt being refinanced must have been used for non-capital expenditures.
Refinancing Projects Involving Limited or Single Purpose Properties
Interim Rule: Unlike temporary debt refinancing, the borrower must make at least a 15% borrower contribution if the 504 eligible fixed assets securing the qualified debt include a limited or special-purpose property.
Final Rule: No change at this time. However, the SBA may determine, in its discretion that in the event of an economic recession, to allow a borrower contribution of 10% for limited or special use properties.
Further, the final rule clarifies that, when the refinance project includes a limited or special-purpose property, third party lenders will not be required to contribute at least 50% of total project costs, but, as required for all projects financed under the Debt Refinancing Program, their participation must be at least equal to the SBA 504 loan.
Extension of Disbursement Deadline
Interim Rule: All debt refinance without expansion loans must fund within 6 months of loan approval unless the director, Office of Financial Assistance (D/FA) or designee approves an extension(s) for good cause.
Final Rule: All debt refinance without expansion loans must fund within 9 months of loan approval unless the D/FA or designee approves an extension(s) for an additional 6 months for good cause. The maximum time to disburse is 15 months.
For more information about SBA 504 loans in Florida, South Alabama or South Georgia, contact a Florida First Capital Loan Officer or email us at firstname.lastname@example.org. Phone: 850.681.3601 or toll-free at 800.504.LOAN.