Small Businesses Can Refinance Commercial Mortgage and Other Business Debt Under the SBA 504 Loan Program.
Small business owners can lighten their monthly debt payments and access equity trapped in commercial real estate holdings by refinancing conventional real estate loans through the SBA’s permanent 504 Debt Refinancing Program.
Under the program available through Florida First Capital, small businesses can take advantage of below-market, fixed interest rate refinancing with repayment terms up to 25 years for up to 90% of the appraised value of commercial real estate property, without the requirement of expansion, which was required in the past. Borrowers may also refinance eligible business operating expenses (cash-out option).
Overview of the 504 Debt Refinancing Program
- Loans made under the 504 Debt Refinancing Program are 504 loans and are subject to all applicable SBA 504 Loan Program requirements.
- 504 loan proceeds are to be used to refinance qualified debt with no money going toward expansion.
- For borrowers that refinance only long-term fixed asset debt (no cash out), the maximum LTV is 90% of the fair market value of the eligible fixed asset(s).
- 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.
- When the project involves a limited or single purpose building or structure, the borrower must contribute not less than 15%.
- 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.
- Debt is not included as an eligible business expense, except debt that was incurred with a credit card or a business line of credit may be included if the credit card or business line of credit is issued in the name of the small business and the applicant certifies that the debt being refinanced was incurred exclusively for business related purposes.
- 504 refinancing costs may also be included in the loan.
- At least 85% of the original loan was used to acquire, construct or improve fixed assets.
- The borrower must have been in business for 2 years prior to submission of the refinance application and 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, Florida First Capital will determine whether the borrower is considered a new business based on the following: “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.”
- The property must be owner occupied, i.e., the business must occupy at least 51% of the total square footage.
- Debt must have been incurred not less than 2 years prior to the date the refinance application is received by the SBA. However, in certain situations loans refinanced within the 2 years prior to the date of application may be eligible.
- A commercial loan that was refinanced within the 2 years prior to the date of application (the most recent loan) may be deemed incurred not less than 2 years before the date of the application provided that the effect of the most recent loan was to extend the maturity date without advancing any additional proceeds (except to cover closing costs) and the collateral for the most recent loan includes, at a minimum, the same eligible fixed asset(s) that served as collateral for the former loan that was refinanced.
- The loan to be refinanced must be current on all payments due (no payment more than 30 days past due from either the original payment terms or modified payment terms) during the one-year period prior to the date of the refinance application.
- An independent appraisal of the fair market value of the project assets and any additional assets offered as additional collateral must be provided. Appraisals are not required at time of application, but are required prior to closing and must be dated no earlier than 1 year prior to the date the application was approved by the SBA.
Loan Structure/Down Payment Schedule
- Total of first and second mortgages on refinance deals will be up to 90% (85% max LTV on cash-out deals); the structure will vary depending upon the transaction. Contact a Florida First Capital Loan Expert for a sample deal structure.
- In addition to a cash contribution, the borrower’s down payment can 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 as collateral.
- Existing SBA 504 loans and other government guaranteed loans are not eligible.