SBA Launches Temporary Program for Commercial Real Estate Refinancing

Agency will begin accepting refinancing applications Feb. 28 for small businesses facing maturing mortgages, balloon payments

WASHINGTON, D.C. – Small businesses facing maturity of commercial mortgages or balloon payments before Dec. 31, 2012, may be able to refinance their mortgage debt with a 504 loan from the U.S. Small Business Administration under a new, temporary program announced today. 

The new refinancing loan is structured like SBA’s traditional 504, with borrowers committing at least 10 percent equity and working with third-party lending institutions and SBA-approved Certified Development Companies in the standard 50 percent/40 percent split. A key feature of the new program is that it does not require an expansion of the business in order to qualify. 

SBA will begin accepting refinancing applications on Feb. 28. The program, authorized under the Small Business Jobs Act, will be in effect through Sept. 27, 2012.

“The economic downturn of recent years and the declining value of real estate have had a significant, negative impact on many small businesses with mortgages maturing within the next few years,” said SBA Administrator Karen Mills. “As a result, even small businesses that are performing well and making their payments on time could face foreclosure because of the difficulties they face in refinancing and restructuring their mortgage debt. This temporary program is another tool SBA can provide to help these small businesses remain viable and protect jobs.”

The SBA initially will open the program to businesses with immediate need due to impending balloon payments before Dec. 31, 2012.  SBA will revisit the program later and may open it to businesses with balloon payments due after that date or those that can demonstrate strong need in other ways. 

“We are making this initial restriction to make sure our funding goes first to small businesses with the most need,” said Steve Smits, SBA Associate Administrator of Capital Access.

Borrowers will be able to refinance up to 90 percent of the current appraised property value or 100 percent of the outstanding mortgage, whichever is lower, plus eligible refinancing costs.  Loan proceeds may not be used for other business expenses. Existing 504 projects and government-guaranteed loans are not eligible to be refinanced.

Congress authorized SBA to approve up to $15 billion in loans under this program ($7.5 billion in both fiscal 2011 and 2012).  Together with the first mortgage, this temporary program will provide up to $33.8 billion of total project financing.  Additional fees charged to the borrower will cover the cost of this refinancing program and as a result no subsidy will be needed.  The program is expected to benefit as many as 20,000 businesses.

SBA’s traditional 504 loan program is a long-term financing tool, designed to encourage economic development within a community. A 504 loan provides small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.

Typically, a 504 project includes three elements: a loan (or first mortgage) secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a second mortgage secured with a junior lien from an SBA Certified Development Company (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business borrower.

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SBA Loan Guarantees Revert to Pre-Stimulus Levels

The time has come to say goodbye to the 90 percent loan guarantee and reduced fees that supposedly sparked a rebound in Small Business Administration lending; though many reports have indicated small business lending has practically evaporated in spite of the stimulus package enhancements.

In a few days, the SBA will run out of the $375 million in economic stimulus funds that enabled the agency to offer these enhancements. As a result, beginning Monday, Nov. 23, borrowers will have to make a choice:  They can be put on a waiting list to receive these breaks as stimulus funds become available, or they can apply for a regular SBA loan with higher fees and a lower government guarantee for the lender.

The SBA expects additional funds to become available to make loans under the stimulus provisions since not everyone who is approved for a loan will go through with it. However, loans on the stimulus waiting list run the risk of never getting funded.

As recently as Nov. 18, SBA officials said they expected to be able to make loans under the stimulus provisions into December. But loan applications surged this past week as borrowers and lenders tried to get their applications in before the stimulus money ran out.

SBA lenders, small-business groups and the Obama administration have urged Congress to find money to extend the stimulus enhancements. But Congress has to-date failed to do so.

As a result, government guarantees on 7(a) loans will revert back to the standard 75 percent for loans of more than $150,000, and 85 percent for loans of $150,000 or less. Fees on 7(a) loans and 504 loans, which are used to finance real estate, will revert to their normal levels as well.