By Elizabeth Braman
Commercial borrowers are now able to refinance existing loans to 90% using the Small
Business Administration's 504 loan program, thanks to a new law enacted on September
27, 2010. This law brought about significant changes to the SBA's lending guidelines.
Most significantly, SBA loans now create opportunities for overleveraged property
owners to refinance into lower rate, stable, long‐term commercial mortgages.
The 504 program recognizes that dropping property values have made refinancing
difficult for many property owners. Accordingly, owner occupied properties can now be
refinanced up to 90% of the appraised value OR 100% of the outstanding mortgage,
whichever is less.
To help properties that are overleveraged, the SBA now permits borrowers to use
additional collateral, such as a home, equipment or another commercial property, to use
as part of their 10% required equity.
SBA 504 loans were primarily used to purchase commercial real estate by small business
owners who occupied at least 51% of their property. The funds can now be used to also
refinance properties, including debt acquired in support of a commercial real estate
project such as machinery, equipment and leasehold improvements, plus eligible
refinancing costs and prepayment penalties.
In addition to the refinance component, the SBA is seeking to reach more middle market
companies by increasing several of the borrowing thresholds for the 504 program. Now
qualified companies with a tangible net worth of $15,000,000 (up from $7,000,000) or
less will qualify for an SBA loan as long as their last two-year average after-tax net
revenue is under $5,000,000 (up from $2,500,000). The SBA’s share of the 504 loan has
increased to $5,000,000, except for manufacturers who can finance up to $5,500,000.
The SBA’s 504 program’s current lending terms:
90% leverage with two loans; a first loan at 55-65% leverage offered by a conventional
lender on conventional loan terms (variable, 3, 5, 7 and 10 year fixed loans with 20-25
year amortization periods) and a second loan, which is a fixed 10 or 20 year debenture
(4.894% for 10 year and 5.93% for 20 year in March 2011). The borrower is required to
bring the remaining 10-15% equity to the project.
In a controversial and widely criticized move, the SBA 504 refinance program initially
could only be used to refinance loans that were due on or before December 2012 with a
balloon payment. This requirement left out many property owners with loans due beyond
December 2012, including many of the 5+5 year loans written in 2006 and 2007 that are
due for a rate adjustment this year but don’t have immediate balloon payments. Now,
with a change that will be published in The Federal Register by April 6, 2011, all loans
will be available for refinance as long as they otherwise meet the additional eligibility
requirements.
There are a number of requirements for borrowers to qualify to refinance under the 504
program:
The property must have been financed more than 24 months prior to a refinance.
The loan has a balloon payment.
The borrowing business has continued operations over the previous 24 months.
The refinance cannot be used to take out an existing government loan, such as
other SBA 504 or 7A loans or USDA loans.
The loan to be refinanced must be current for the last 12 months.
The loan to be refinanced must have been used to purchase real estate, or if
improvements, only those eligible under 504 guidelines.
The SBA does not lend any funds directly. Rather, the SBA works with a Certified
Development Company (CDC), which is a private, nonprofit corporation. The CDC
secures the second lien debenture, which is 100% guaranteed by the SBA.
At present, applications to use SBA 504 refinance funds must be approved by the SBA
before the end of September 2012. The SBA estimates 20,000 businesses could be
eligible to receive assistance with $15 billion in financing, increasing to $30 million with
leverage offered by the banks.

Elizabeth Braman, JD, MBA, CCIM is president of Los Angeles-based Watermark
Financial, Inc., a commercial real estate financing firm. Contact her at
[email protected].