{meta_title}

SBA Launches Major Changes to 504 Debt Refinancing Program

Oct 2011

Effective immediately, 504 debt refinancing loans can be structured the same as regular 504 loans as long as the total debt being refinanced is no more than 90% loan-to-value.

Until now, the third party lender loan had to be 50% of the appraised value of the project property being refinanced.

Another major change to the program enables a small business to refinance not only existing debt but, more importantly, use excess equity to obtain working capital that can be used for financing of eligible business expenses.

The changes are part of several restrictions the Small Business Administration (SBA) recently eased in an effort to increase an otherwise low volume of 504 refinance loans that have been processed since the program's inception last February.

The 504 refinancing program is only for businesses that can demonstrate their maturing fixed asset debt loans are current and they have successfully made all required payments under original or modified bank terms. A new, independent appraisal is required for all refinance projects, and existing 504 projects and government guaranteed loans are not eligible to be refinanced.

Florida First Capital has led the way as the only certified development company (CDC) in Florida to structure, process and obtain SBA authorizations for 504 debt refinancing loans since the program's inception and will continue to do so until the program expires on Sept. 27, 2012.

Following is a summary of the refinancing program changes as published Oct. 12, 2011, in the Federal Register:

* Third Party Lender Loan

The third party lender loan is no longer required to be at least 50% of the appraised value of the 504-eligible fixed assets. Now, as in the regular 504 loan program, the third party lender loan must be at least as much as the 504 loan.

* Financing Business Expenses

A borrower may now use its equity to finance eligible business expenses as part of the refinancing project provided that the amount of cash funds available to pay business expenses exceeds the amount to be paid to the lender of the qualified debt being refinanced. The borrower's application must include a specific description of the business expenses to be financed and an itemization of the amount of each expense.

"Eligible business expenses" is defined as expenses of the borrower, such as salaries, rent, utilities, inventory, or other obligation of the business that were incurred, but not paid prior to date of the 504 loan application or that become due for payment within 18 months after the date of the application.

Both the CDC and borrower will be required to certify in the application that the funds will be used to cover the eligible business expenses of the borrower. The borrower must, upon request, substantiate the use of funds to finance the business expenses (for example, through bank statements, invoices marked "paid," cleared checks, etc.).

* Qualified Debt

Because the qualified debt to be refinanced may have been refinanced one or more times previously with the borrower using its equity at that time to finance working capital or other expenses, the SBA has amended the regulation to provide that as follows: if the eligible fixed asset was originally financed through a commercial loan that would have satisfied the “substantially all” standard of 85% and was subsequently refinanced one or more times with the current commercial loan being the most recent refinancing, then the current commercial loan will be deemed to satisfy the "substantially all" standard. The borrower must certify that the existing debt satisfies the applicable requirements and the third party lender must certify, as part of the 504 loan application, that it has no reason to believe that the existing debt does not satisfy these requirements.

On a random basis, the SBA may require the borrower and/or lender to submit additional documentation to support these certifications prior to closing the debenture, including the documents for the original loan used to acquire the fixed asset and subsequent refinancing documents to show that the current commercial loan is the most recent refinancing. The SBA will cancel an approved 504 loan if the documents do not support the certifications. If the borrower and/or lender are unable to produce the additional documentation, each must certify that it has made a diligent search for the documents and that the documents are not in its possession. The SBA will not cancel an approved loan solely because the borrower and/or lender are unable to produce the documentation unless the lender is the original lender who made the original loan to acquire the 504-eligible fixed asset (and not a lender who acquired or merged with the original lender.)

This same change in the "substantially all" standard has also been made for the 504 permanent expansion debt refinance program.

* Occupancy

The original loan may not have satisfied the percentage occupancy requirements of 51/49% for an existing building or 60/20/20% for new construction. The final regulations provide that as long as the borrower can demonstrate that it now occupies at least 51% of the building as of the date of 504 loan application, the percentage occupancy requirements are met.

* Current on Payments

The definition of “current on all payments due for not less than one year” has been amended to allow a borrower to be deemed current as long as during the 12-month period prior to the date of 504 loan application, no payment was more than 30 days past due under either the original payment terms or under modified payment terms (including deferments). Any modification of payment terms must have been agreed to in writing by the borrower and lender prior to Oct. 12, 2011, when the final regulations were published. The SBA reserves the right to decide whether modified repayment terms would preclude refinancing.

* Closing Period

Temporary debt refinance 504 loans must be disbursed within six (6) months after loan approval unless an extension for good cause has been granted. Extensions of the disbursement period up to an additional 3 months may now be granted for good cause.

For more information about SBA 504 loans in Florida, contact Florida First Capital by visiting www.ffcfc.com, emailing at info@ffcfc.com or calling 888.320.5504.