New SBA refinance program may help small businesses



The economy finally seems to be showing some signs of life, with the positive March jobs report and drop in the national unemployment rate to under 9 percent being the most recent reasons for optimism.

Some businesses, however, face a ticking time bomb that could put them at substantial near-term risk: companies with maturing commercial mortgages or balloon payments in the near future and whose property value has declined significantly. The good news for these businesses is that a new Small Business Association (SBA) program that’s designed to help address this specific problem took effect in February.

The SBA 504 Debt Refinance Program allows qualifying small businesses and commercial professionals to refinance up to 90 percent of the current appraised value of the property, or up to 100 percent of the outstanding principal, whichever is lower (plus 504 refinancing fees). This program runs through September 27, 2012.

“Balloon payments put commercial borrowers at considerable risk and this program removes that risk for borrowers that qualify,” says Jon Daly, the Director of SBA Lending for State Bank and Trust. “It takes some of the uncertainty out of the next few years and buys some more time for property values to hopefully start coming back.

“This program will make banks a whole lot more comfortable working with borrowers who qualify.”

These SBA 504 loans are structured as follows:

1 The first mortgage is secured with a senior lien from a private sector lender and covers up to 50 percent of the project cost.

2 The SBA 504 loan constitutes a second mortgage in the form of a junior lien from an SBA Certified Development Company (backed by a 100 percent SBA-guaranteed debenture) and covers up to 40 percent of the project cost.

3 The borrower contributes the remaining 10 percent equity of the project cost.

The thing that makes this program so attractive, says Daly, is the fact that borrowers only need 10 percent equity in the property. “In today’s environment, most banks want to be at 75-80 percent loan-to-value on any kind of real estate loan, but this allows banks to go all the way to 90 percent.”

The program works best for loan amounts between $500,000 and $10 million, Daly notes. “There are better options for small loans, but this program is perfect for commercial mortgages within this range.”

You should note that the property must be owner-occupied (the business must occupy at least 51 percent of the property)—the program is not designed for income producing property. Also, the business must have been in existence for at least two years prior to submission of the application, and the debt must have been incurred not less than two years prior to the date of application.

There are other qualification criteria and restrictions so you should talk to your banker about your situation. But if you do qualify, the program could be a real life preserver for your business.

“This is by far the best solution that has come out yet for those that qualify,” adds Daly. “It has the potential to be the most effective solution for the greatest number of business borrowers.”

Brian Patton, CCIM is a commercial real estate broker, author, and instructor. He can be reached vis his website: or at 770 634 4848.

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