By Robert Polito
Under recent changes to the Small Business Administration’s 504 loan program, conventional owner-occupied commercial real estate loans are now eligible for refinancing. These changes greatly expand the number of eligible businesses and offer significant debt-service savings. Those savings could free up resources for businesses to hire new employees, purchase inventory or simply reduce overhead.
The temporary revisions, which are unprecedented in the program’s history and became effective in February, provide owners with a worry-free capital structure that allows them to focus on their business operations.
Under the changes, commercial real estate debt and any other debt acquired in support of the commercial real estate project can be refinanced. This could include machinery and equipment purchased and leasehold improvements in support of the business operations. The changes apply regardless of when the loan matures.
The SBA can also include other debt, up to 15 percent of the total refinance, under certain conditions, and will also allow the re-amortization of the original debt. The ensuing loan based on the refinancing, to include other projects costs and re-amortization, could significantly lower the required debt service to the business owner.
As borrowers have remained current on their loan payments, many have seen a decline in their businesses’ revenue and margin. Asset values of the underlying collateral are also an immediate concern in the renewal process. A renewal of the commercial real estate loan could be in doubt. The changes in the SBA’s 504 loan program can alleviate many risks in loan exposure and loan-to-value. Bankers can be very positive when it comes time to discuss a maturing commercial real estate loan when an SBA 504 refinance is offered.
Additional SBA 504 requirements for the refinance include:
• A 90 percent loan-to-value (a very liberal lending requirement) or a minimum of 10 percent equity;
• The borrower must be current on debt payments during the previous year, and
• A bank-ordered new appraisal.
Borrowers are advised to work with a bank having extensive SBA-related experience and knowledge of the process.
These recent changes encompass a wide population of commercial real estate borrowers. One typical scenario is where a business owner purchases commercial real estate to locate a business. The business owner closes on a conventional commercial mortgage, but post-closing, uses precious working capital to improve the property with leasehold improvements. The business owner may have even purchased additional machinery and equipment for the new site.
Under the SBA’s changes, the owner could refinance the conventional commercial mortgage, all the leasehold improvements and the machinery and equipment into one loan, amortized over 25 years. Refinancing the leaseholds, machinery and equipment into a longer amortization can have a significant and positive impact on the businesses cash flow.
The return of the cash used in the leasehold improvements back to cash will also greatly assist in the business’s working capital position. The above scenario is also appropriate when the business has unforeseen commercial real estate expenses or if building had an overage in the construction budget.
With the SBA recently increasing its lending limit for the SBA’s share to be as high as $5.5 million on an SBA 504 loan, coupled with the bank’s participation, this program satisfies most business’s needs now and well into the future. It is estimated that 20,000 businesses could be eligible to receive assistance with $15 billion in financing, rising as high as $30 billion with leverage by the banks.
The SBA has filled the gap for borrowers with the most need, many of whom have their largest business asset at risk. Demand is difficult to predict. Will bankers offer SBA credit facilities to their borrowers? Doing so enables the business owner to improve their capital structure, and the bank to assist in potential job creation and financing the economic recovery.
