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SBA Issues Changes to 504 Debt Refinancing Program

Nov 2016

The Small Business Administration (SBA) has issued further guidance on program requirements specific to the new permanent 504 Debt Refinancing Program. The changes are effective as of Nov. 17, 2016.

SBA Policy Notice 5000-1939 changes and clarifies 504 Debt Refinancing Program requirements originally provided on May 26, 2016 in SBA Policy Notice 5000-1382: Reauthorization of 504 Debt Refinancing Program.

1) Eligibility - New Business:

The borrower must have been in operation for all of the 2-year period ending on the date of application, as evidenced by the financial statements submitted at the time of application. If the ownership of the borrower has changed during this 2-year period, the Certified Development Company (CDC) must follow the new business guidance in Standard Operating Procedure (SOP) 50 10 5 (H) and determine whether the borrower is considered a new business, and document the justification for its determination in its credit memorandum. SOP 50 10 5 (H) defines “new business” as follows:

New business is a business that is 2 years old or less at the time the loan is approved. A business that is more than 2 years old at the time the loan is approved may be considered a new business if it is a change of ownership that will result in new, unproven ownership/management and increased debt unrelated to business operations.

2) Loan-to-Value (LTV) Limitation Update for the Financing of “Business Operating Expenses” from 75% LTV to 85% LTV:

a. There is no change to the LTV for qualified debt and other secured debt. Both will remain 90%.

b. For any projects that include the financing of “business operating expenses,” a maximum 85% LTV of the refinancing project will apply, 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.

3) Appraisals:

Appraisals are not required at time of application, but must be submitted to and approved by the Sacramento Loan Processing Center (SLPC) prior to closing. Appraisals must be dated no earlier than 1 year prior to the date the application was approved, and must otherwise comply with the requirements for appraisals set forth in SOP 50 10 5 (H).

4) Same Institution Debt/Escrow Account Option:

When the loan being refinanced is same institution debt, either an interim loan or an escrow account may be used, and:

a. The third party lender (who, in this case, is also the lender of the debt being refinanced) must execute SBA Form 2416, Lender Certification for Refinanced Loan.

b. The CDC may create an escrow account at the time of closing of the 504 loan for the purpose of holding the borrower's cash contribution, if any, and the net debenture proceeds. The following requirements apply to the escrow account (“the account”):

i. The escrow account will be established in accordance with an escrow agreement which must be executed by the borrower, the third party lender, the escrow agent and the CDC. The escrow agent may be the CDC attorney, title company or other party approved by the SBA district counsel.

ii. The borrower's cash contribution, if any, must be deposited into the account at the time of closing of the 504 loan.

iii. A copy of the escrow agreement must be provided to the SBA's District Counsel with evidence of funding by the borrower's cash contribution, if any, at the time of closing of the 504 loan.

iv. The net debenture proceeds must be wired to the account, and all funds may be released only upon written approval by the CDC and SBA, provided that CDC/SBA have the required lien positions on the collateral as set forth in the authorization and debenture guaranty.

v. The debt to be refinanced will be satisfied by payment of the escrowed funds to the third party lender.

These are significant enhancements to the regulatory framework, and will allow wider use of the benefits of the 504 program. With the issuance of a final rule yet pending, further developments remain possible.

Small business owners feeling the pressure of high-interest commercial mortgage debt can get relief under the SBA's new permanent 504 Debt Refinancing Program available through Florida First Capital without the requirement of expansion, which was normally the case in the past.

Under the program, small businesses can take advantage of up to 90% refinancing at below-market, fixed interest rates with repayment terns up to 20 years to lighten their monthly debt payments, improve cash flow and stabilize operations. The program allows for the refinancing of commercial mortgages as well as other business debt and expenses with a cash-out option available.

SBA 504 Debt Refinancing Program

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