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At a Glance: 504 Commercial Mortgage Debt Refinancing Program

Feb 2011

The following is a synopsis of the guidelines for the new temporary 504 loan program commercial mortgage debt refinancing program.

• This is phase 1 of a 2 phase program. Phase 1 immediately addresses loans maturing (ballooning) on or before Dec. 31, 2012. At a later date, the SBA may allow other balloons, as well as loans that can demonstrate strong needs in other ways.
• Amount of loan to be refinanced must include at least 85% eligible 504 project costs.
• Loans being refinanced must have been current for the past year with no payment being deferred or past due for more than 30 days. A transcript must be provided. If the loan is “own lender debt,” a full transcript history of the loan must be provided to evaluate risk.
• The third party lender must certify that they have no knowledge of a default or the likelihood of a loss or information related thereto.
• 504 loan proceeds are to be used to refinance the qualified debt with no money going to expansion or purchases. 85% of the refinance must have been for originally eligible purposes and must be documented to the satisfaction of the SBA. The third party lender and the borrower must certify eligibility of use of proceeds and all of the proceeds of the original loan must have been used for the benefit of the small business concern.
• Funding for the refinancing project must come from three sources: third party lender -- not less than 50%; SBA 504 loan -- not more than 40%; and the borrower -- not less than 10% equity injection.
• Debt must have been incurred not less than two years prior to the date the application is received by the SBA.
• The small business concern must have been in business for two years prior to the submission of the application.
• The third party loan and the 504 loan combined may not be more than 90% of the fair market value of the fixed assets securing the combined loans, which may not in any event, exceed the outstanding principal balance of the debt being refinanced.
• If the amount of the refinance is not sufficient to repay the entire outstanding debt, the certified development company (CDC) must disclose how the balance of the debt will be handled, as noted below.
• The lender of the qualified debt to be refinanced may

1. forgive all or part of the deficiency (which may have tax consequences for the borrower);
2. accept payment from the borrower for all or part of the deficiency;
3. accept a new note for the balance which will be subordinate to the liens of the third party lender and CDC/SBA. Such notes will contain at least a three-year stand-by requirement.

• In addition to a cash contribution, the borrower's 10% contribution may be satisfied by its equity in the eligible fixed asset (the 504 project) serving as collateral for the refinancing project or by the equity in any other fixed assets that are acceptable to the SBA as collateral.
• An independent appraisal of the fair market value of the project assets and any additional assets offered as additional collateral must be provided and must be dated within six months of the application.
• Additional collateral pledges may have preexisting liens to the third party lender and the CDC/SBA.
• Debt may be refinanced even if it does not meet the job creation or other economic development objectives. However, then the 504 loan size may not exceed the product obtained by multiplying the number of full-time equivalent employees (40 hour work week) of the borrower by $65,000. (Note “504 loan size” is believed to refer to the debenture, not the entire project.)
• No refinancing of loans with an existing federal guaranty (e.g., a 7(a) loan or USDA loan).
• No refinancing of a loan which is already part of an existing 504 project.
• No refinancing of debt from an associate of the third party lender/CDC, SBIC or a New Market Ventures Capital Companies (NMVCC).
• No refinancing of debt where a creditor is in a position to sustain a loss, as determined by the SBA.
• No loans may be processed under delegated authority.
• “Own lender” debt refinanced into a third party lender may not be included in securitization for SBA guaranteed loan pools (secondary market).
• All loans must be funded by the sale of the debenture within six months of approval.
• Delinquencies between approval and funding must be treated as “adverse changes” for approval to fund.
• All loans are subject to an ongoing fee of 1.043% on the outstanding debenture balance.

For more information about the 504 commercial mortgage debt refinancing program, contact a Florida First Capital loan officer (click herefor regional office locations), email us atinfo@ffcfc.comor call us at 888.320.5504.