July 2020
Commercial Lending
SBA Issues Temporary Guidance on Eligibility for 504 Debt Refinancing for Applicants Granted COVID-19 Loan Deferments

The Small Business Administration (SBA) is aware that borrowers may have loans that have been granted deferments in the past few months as a direct result of the COVID- 19 emergency, and that some of these borrowers are interested in refinancing their debt under the SBA’s 504 Debt Refinancing Program, especially now with 504 rates currently under 2.5%.

SBA 504 debt refinancing and COVID-19 loan defermentsUnder normal circumstances to refinance a loan under the SBA’s 504 Debt Refinancing Program, including both with and without expansion, the applicant must have been current on all payments due on the debt to be refinanced for not less than 1 year before the date of the application (without expansion) or for not less than 1 year before the date of the refinancing (with expansion).

So, what happens if the applicant has received a COVID-19-related deferment within the past 1 year and has not been “current on all payments”?

Through Dec. 31, 2020, a debt that was granted a COVID-19-related deferment at any point during the past 12 months (regardless of whether the debt is still on deferment, in catch-up or returned to regular payments) will qualify for 504 Debt Refinancing under the following conditions:

  The applicant must bring itself current on all the payments that were deferred prior to the loan being approved for debt refinancing;

  The deferment on the loan to be refinanced must have been granted on or after March 1, 2020, and the borrower must include a statement in the application that the deferment was granted due to the borrower being adversely affected by COVID-19; and

  The applicant must otherwise be current on all payments due as required by the SBA and 13 CFR sections 120.882(e)(6) and 120.882(g)(15)(vii).

For debt refinancing without expansion, small business owners can refinance up to 90% of the appraised value of commercial real estate property (no cash out) with repayment terms up to 25 years.  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 20% of the value of the eligible fixed asset(s) securing the qualified debt.  Eligible business operating expenses include any other expenses of the business that are not capital expenditures (e.g., salaries, rent, utilities, inventory, etc.) 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.

For debt refinancing with expansion, 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.

For more information about the SBA 504 Debt Refinancing Program in Alabama, Florida or South Georgia, contact a Florida First Capital Loan Officer or email us at info@FloridaFirst.com.  Phone: 850.681.3601 or toll-free at 800.504.LOAN.