504 loan refinancing program

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504 Loan Refinancing Program

Temp orary 504 Loan Refinancing for Eligible Small Business Ass ets Under the Jobs Act.

Fact Sheet

Market research shows that a large percentage of commercial mortgages outstanding are set to mature within thenext few years, particularly those held by community banks. As real estate values have declined, however, even

small businesses that are performing well and making their payments on time can have a hard time refinancing these

loans and may need to restructure their debt. Also, public comments and the Small Business Jobs Act tour identified

that access to working capital is currently the biggest credit gap in the marketplace. This is even true for businesses

with equity in their properties.

Under the Small Business Jobs Act, the SBA has implemented a temporary programauthorized until September 27,

2012allowing small businesses to refinance eligible fixed assets in its 504 program without requirement of an

expansion. This program provides small businesses the opportunity to lock in long-term, stable financing, and finance

eligible business expenses as well as protect jobs and hire additional workers. Key program changes were made in

April 2011 and with the issuance of a final rule, effective October 12, 2011. These changes are highlighted inbold

type.

Key Program Features

SBA launched this temporary program on Feb. 17, 2011, and began accepting loan applications on

February 28, 2011. The program will end on September 27, 2012.

Beginning October 12, 2011 borrowers can finance up to 90 percent of the appraised value of

available collateral, which could include fixed assets acceptable to SBA (for example: commercial

or residential real property). This allows borrowers with more than 10 percent equity to be able to

obtain additional proceeds to pay for eligible business expenses.

In April, SBA expanded the program parameters by allowing any business with a commercial

mortgage that is two or more years old to refinance its debt, regardless of maturity. The program is structured like SBAs traditional 504 loan program: borrowers will work with third-party

lending institutions and SBA-approved Certified Development Companies (CDCs), typically private, non-

profit organizations to obtain financing, in a traditional 10%/50%/40% split. However, the program no

longer requires the Third Party Lender to be 50 percent of the Project. The Third Party Lender

amount must be equal to or greater than the SBA amount. This allows the small business to

maximize the amount of long-term, low interest, fixed rate financing available.

SBA estimates that as many as 8,000 businesses may participate in this program during the current fiscal

year, which will provide up to $7.5 billion in SBA-guaranteed financing leading to total project financing of

almost $17 billion.

The program, which is completely separate from SBAs traditional 504 program, is zero-subsidy, requiring no

cost to the taxpayer: It will be funded entirely through additional fees assessed for refinancing projects.

Key Risk Mitigating Factors

The definition of Current has been modified to allow more credit worthy businesses to qualify.

The definition is now:


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--In the last year, no payments more than 30 days past due according to original or modified

terms (including deferments)

--Any modification must have been entered into in writing prior to October 12, 2011 (date of

publication of Final Rule).

--SBA reserves the right to determine if a modified payment schedule would preclude refinancing

under this program.

SBA will perform full and thorough underwriting on all refinancing applications (i.e., there are no delegated

lenders).

A new, independent appraisal will be required for all projects but is not necessary at time of loan

approval. Project financing may need to be resized depending on the results of the independent

appraisal.

Government guaranteed loans are not eligible for this refinancing program.

SBAs Permanent 504 Loan Program

SBAs 504 loan program is a long-term financing tool designed to encourage economic development within a

community. The 504 Program accomplishes this by providing small businesses with long-term, fixed-rate financing to

acquire major fixed assets for expansion or modernization.

Proceeds from 504 loans must be used for fixed asset projects, such as:

The purchase of land, including existing buildings

The purchase of improvements, including grading, street improvements, utilities, parking lots and

landscaping

The construction of new facilities or modernizing, renovating or converting existing facilities

The purchase of long-term machinery and equipment

Temporarily until September 27, 2011, refinancing of fixed assets without expansion and financing of eligiblebusiness expenses.

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.

FAQ: New Temporary 504 Refinancing ProgramQ: How is the temporary Jobs Act Debt Refinance program different from the permanent 504 debt refinance

program?

A:In the permanent 504 refinancing program approved under the Recovery Act, the project is required to have an

expansion component and the refinanced portion must not exceed 50 percent of the total cost of the expansion. The

new, temporary 504 refinancing program does not allow an expansion to be financed and can only be used to

refinance existing eligible debt.
http://www.sba.gov/content/faq-new-temporary-504-refinancing-programhttp://www.sba.gov/content/faq-new-temporary-504-refinancing-programhttp://www.sba.gov/content/faq-new-temporary-504-refinancing-program


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Q:Is financing for business expenses allowed for in this program?

A:The Small Business Jobs Act authorized SBA to provide funding to small businesses for additional business

expenses not originally part of the debt being refinanced. On October 12, 2011, SBA revised the program to allow

financing of eligible business expenses.

Q: What eligible business expenses may be paid with the refinancing proceeds?

A: Any expense directly related to business operations. Examples include: indebtedness to the business, salary,

utilities, inventory, or insurance.

Q: What is the benefit of allowing first mortgage loans to be less than 50% of the project?

A:It maximizes the amount of long term fixed rate debt.

Q: Can I pledge other collateral to cover my equity requirement or to finance business expenses?

A: Yes. Other fixed assets acceptable to SBA may be pledged.

Q:How long must a small business be in operation to be eligible for this loan program?

A: The Small Business Jobs Act states that debt must have been incurred at least two years prior to the applicationdate to be eligible for refinancing under this program. Therefore, a business must have been in operation for at least

two years prior to the date SBA receives the loan to be eligible for refinancing.

Q: Has the program been expanded to allow loans that mature after December 31, 2012?

A:Yes, the program initially targeted businesses that have maturing mortgages and/or ballon payments coming due

within the next two years. These businesses had the greatest need for the funding available for this program as a

number would face foreclosure without it. However, on April 4, 2011, SBA expanded the program to include loan

maturities after December 31, 2012.

Q: What if the debt being refinanced includes some proceeds that would not be eligible for the traditional 504

program?

A:The existing debt may qualify if the loan that originally financed the eligible fixed asset satisfies the 85/15 criteria

and the current commercial loan is the most recent refinancing of that original loan.

As long as a substantial portion (85% or more) of the original loan was used to acquire, construct or improve eligible

fixed assets, it would qualify for refinancing under this program.

Q: Are assets financed with a federal guaranteeincluding an SBA-approved 7(a) or 504 loanseligible for

refinancing under this program?

A:No. The Small Business Jobs Act prohibits loans with any government guarantee from being refinanced under this

program.

Q: What about existing first mortgages originally financed under the 504 program by third-party lenders?Why is there a prohibition on refinancing that debt?

A: SBA is restricting the program to mortgages not funded under the 504 program, as these third-party lenders have

already benefitted from having access to subordinated debt provided by the federal government.

Q: Why are first mortgages under this program that are being refinanced by the same institution that made

the original loan not allowed to be sold on the secondary market as part of a pool of guaranteed loans?


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A:This requirement ensures a long-term commitment of the Third Party Lender (TPL) as a measure to minimize the

potential that a TPL might submit marginal credits for introductions into the 504 portfolio. A new lender refinancing

another unaffiliated institutions loan can be sold in the SBAs First Mortgage Loan Pool program.

Q: Why must all Jobs Act 504 Debt refinancing loans be disbursed within six months of approval?

A:By law, this refinancing program ends September 27, 2012. Loans that do not disburse within 6 months will be

cancelled to enable other businesses to access the program before the expiration date.

Q: How would the small business show that substantially all of the debt was for 504-eligible purposes and

that the remainder of the debt was for the benefit of the small business?

A:The application must include certifications by the small business, CDC and Third Party Lender that either:

(a) If the original loan is the current loan: substantially all (85% or more) of the proceeds of the indebtedness

being refinanced was used to acquire an Eligible Fixed Asset (e.g., land, including a building situated thereon, to

construct a building thereon, or to purchase equipment) and the remaining amount (15% or less) was incurred for the

benefit of the small business seeking the refinancing; or

(b) If the original loan has been refinanced: The loan that originally financed the Eligible Fixed Asset must satisfy

the 85/15 criteria ANDthe current commercial loan is the most recent refinancing of that original loan.

Both the small business and the CDC must certify that the debt satisfies these requirements, and the Third Party

Lender must certify in its commitment letter that it has no reason to believe that the existing debt does not satisfy the

requirements.

Q: Why is the Sacramento Loan Processing Center conducting a random sampling of use-of-proceeds

documentation?

A: Reviewing the documentation on loan use-of-proceeds allows SBA to ensure that borrower, lender, and CDC

certifications are valid and appropriate. If the borrower and lender cannot provide the documentation, they must each

certify that they have made a diligent search and that the documents are not in their possession. SBA will not cancel

an approved loan before disbursement on this basis, but does expect a lender to be able to produce the

documentation if it is the original lender.

Q: Why are PCLP CDCs not allowed to process applications for refinancing under delegated authority?

A: A CDC with PCLP authority may submit applications for refinancing to the processing center, like any other CDC,

but the statute prohibits it from using its delegated authority for this program.

Q: The rules indicate that the loan must have been current. Define current.

A:Current is defined as:

No payments more than 30 days past due according to original or modified terms (including deferments)

Any modification must have been entered into in writing prior to publication of Final Rule in Federal Register

SBA reserves the right to determine if a modified payment schedule would preclude refinancing under this

program (e.g. adversely affects creditworthiness)..

Q: What documentation must be provided to SBA to document the loan(s) to be refinanced are current?

A:If this is the first time the loan is being refinanced, a transcript of loan payments for the last 12 months indicating

the loan has been current for this entire period is required. For loans that have been refinanced more than once, the


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transcript for the last 12 months of the most recent refinancing (prior to Jobs Act project) must be provided. If a loan

has been modified during that twelve month period to grant temporary relief to the borrower, a written agreement of

the modification must be provided and a full transcript may be requested.

Q: What if a bank portfolio transfer has occurred and there are issues obtaining the original debt bank

transcripts?

A:SBA experience with the permanent 504 debt refinancing program is that transcripts are available even after a

bank portfolio transfer; however, it may take longer to obtain such transcripts.

Q: Is the requirement to report any Jobs Act loan delinquency to SBA after loan approval, but before loan

funding, different from the 504 programs policy for the permanent program?

A: It is not. CDCs and Third Party Lenders are always required to disclose an adverse change. SBA is placing an

increased priority on this requirement due to the increased risk of a refinanced loan.

Q: When the amount of the refinance is not sufficient to repay the entire outstanding debt balance, who

decides which of the required methods will be used to handle the balance of the debt?

The small business borrower will negotiate the balance of debt with the third party lender as there may be tax

implications for the business depending on the option chosen.

Q: Will the borrower be required to increase its contribution to 15 % or 20% if the fixed asset to be

refinanced is a limited or special purpose building?

A: No.

504 loan refinancing program

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