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504 Program Gets Big Boost from Stimulus Bill

Feb 2009

The $787 billion American Recovery and Reinvestment Act of 2009 is now law. The good news for the 504 loan program is the Act contains several enhancements that will boost the program's appeal for lenders and borrowers alike.

• Most up-front fees have been eliminated, including the lender participation fee and the certified development company (CDC) processing fee, which will now be paid directly by the federal government. This change will reduce upfront borrower costs by $10,000 on a typical 504 loan.
• Refinancing with a 504 loan is greatly expanded. Existing Small Business Administration (SBA) loans are also eligible and projects that meet certain criteria may be refinanced into a low-rate 504 loan.
• The secondary market will be revived by the creation of a 100% guarantee on 504 first mortgages.

Following is a summary of the changes contained in the final bill, H.R. 1. It contains small business sections from the two bills that were initially passed by the Senate and the House.

Fee Reductions

• The Act provides $375 million for the elimination of fees for both the 7(a) and 504 programs through Sept. 30, 2010.
• For the 504 program, both the bank participation fee of 0.5% and the CDC servicing fee of 1.5% will be zero.
• What is not yet decided is how the $375 million will be distributed between the two programs, which will be at the discretion of the SBA.

CDCs, such as Florida First Capital, will have their servicing fees reimbursed by the SBA.

Low-Interest Refinancing

Another major change is to allow refinancing of existing government guaranteed debt, including 504 loans. Permissible debt financing includes:

(A) Any 504 project "may include a limited amount of debt refinancing."

(B) If the project involves expansion of the small business, an amount not to exceed 50% of the project cost may be refinanced, if:

• Proceeds will be used to acquire land, to construct or expand building or to purchase equipment.
• Existing debt is collateralized by fixed assets.
• Existing debt was incurred for benefit of small business.
• Proceeds will be used only for refinancing existing debt or costs related to the project.
• It will provide a substantial benefit when prepayment penalties, financing fees and other financing costs are accounted for.
• Borrower is current on all payments of the existing debt for not less than one year.
• New financing will provide better terms or interest rate.

H.R. 1 does not exclude government guaranteed debt from indebtedness that may be refinanced, thus making 504 loans and 7(a) loans eligible for refinancing.

This is a permanent addition to the Small Business Investment Act.

Establishment of SBA Secondary Market Guarantee Authority

• The Act establishes a program to provide up to $3 billion in guarantees for 504 first mortgage pools that are to be sold to third-party investors. It appears these may be existing pools of loans, or new loans that may be pooled after the date of enactment.
• The seller of these pools must retain not less than 5% of the pool amount to be sold to investors.
• The seller must absorb all losses resulting from a shortage of monthly cash flows, but gets to keep any overage in monthly cash flows.
• The fee paid to the SBA must be not more than 50 bp of the outstanding guaranteed balance per year (assumed bill change).
• The program ends two years after date of enactment.

Job Creation Goals

• The job creation ratio has been changed from one job per $50,000 to one job per $65,000. This is another permanent change to the Small Business Investment Act.

Timeline

From here, the next step is for policy-makers at the SBA to develop the regulatory changes that will be required to fully implement the provisions of this new law. The exact timeline isn't known as of this writing but as soon as it becomes available we will forward the information to our lending partners.

Additionally, the SBA recently added new 504 public policy goals that benefit small businesses that go green.

Under the SBA's new Energy Efficiency Public Policy Goals, small businesses that go green may now qualify for up to $4 million on the SBA/FFCFC (second mortgage) portion of their 504 loan.

There is still no limit on the amount of the bank's first mortgage loan, and therefore no maximum project size. FFCFC 504 loans can be used for the purchase, renovation or construction of owner-occupied commercial real estate.

$2 Million Eligibility Requirements:

• LEED certified projects (or other rating system) that show the increased use of sustainable, low-impact design. (Examples: superior design/efficiency in a new or improved location.)

$4 Million Eligibility Requirements:

• Projects that reduce energy consumption by at least 10%.
• Projects that generate renewable energy or renewable fuels.(Examples: improved HVAC and improved insulation/lighting; solar; biomass; hydropower; geothermal; wind; and ocean thermal.)

For projects generating renewable energy, it does not need to be the business's primary business activity, just a method of meeting its own energy needs (for example, installing solar panels).

For more information on Florida First Capital and its 504 loan program, visit www.ffcfc.com, email us at insider@ffcfc.com or call 888.320.5504.

Click here for a regionalized listing of FFCFC Business Development Officers.