Market research shows that a large percentage of commercial mortgages outstanding are set to mature within the next 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.

Under the Small Business Jobs Act, the SBA will implement a temporary program—authorized until Sept. 27, 2012—allowing small businesses to refinance eligible fixed assets in its 504 program without requirement of an expansion, as is the case with typical 504 loans. This program will provide small businesses the opportunity to lock in long-term, stable financing, as well as protect jobs.

Key Program Features

• SBA will launch this temporary program on Feb. 17, 2011 and will begin accepting loan applications on Feb. 28, 2011.  The program will end on September 27, 2012.
• Borrowers can finance up to 90 percent of the current appraised property value, or 100 percent of the outstanding principal, whichever is lower, plus 504 eligible refinancing costs.
• SBA will initially open the program only to businesses with immediate need.  Priority will be on those businesses potentially at risk because they face loan maturity or balloon payments before Dec. 31, 2012.  SBA will later revisit the program parameters, and may open the program to businesses with later balloon payments or that can demonstrate need in other ways.
• The program is structured like SBA’s 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.
• SBA estimates that as many as 20,000 businesses may ultimately participate in this program, which will provide up to $15 billion in SBA-guaranteed financing leading to total project financing of over $30 billion.
• The program, which is completely separate from SBA’s 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

• Applicants must demonstrate that their loans are current and that they have successfully made all required payments in the last year.
• A new, independent appraisal will be required for all projects.
• SBA will perform full and thorough underwriting on all refinancing applications (i.e., there are no ‘delegated’ lenders).
• Initially, the first mortgage loans on existing 504 projects are not eligible, and “cash out” refinancings are not permitted.  SBA may later revisit these restrictions.   In addition, no government guaranteed loan is eligible for this refinancing program.

SBA’s 504 Loan Program

SBA’s 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

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.

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.
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SBA Release 11-14. Page 2…

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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AUSTIN, Texas – December 9, 2010 – Veteran bank executive and local civic leader Suzanna Caballero has been named president and chief executive officer of Texas Certified Development Company (TXCDC), the state’s oldest and largest for-profit community development corporation. Caballero leaves her post as senior vice president of Wachovia, a Wells Fargo bank, to replace TXCDC chief Ernest Perales who retires this year after 18 years as president.

Formed in 1981 by Austin entrepreneur Paul Tovar, TXCDC works in partnership with banks and other private lenders to provide capital, credit and financial services to businesses creating jobs throughout Texas, especially in underserved communities. TXCDC is licensed to market, originate, close and service 504 loans through the U.S. Small Business Administration. Since its inception, the company has loaned $703 million to 553 businesses and has created and retained more than 13,000 jobs for the state of Texas.

Caballero is a 36-year veteran of banking in Central Texas with stints at Cattlemen’s, Norwest, Wells Fargo and Washington Mutual prior to joining Wachovia in 2004. An active community leader, Caballero has also served as Chair of the Board of Directors of Leadership Austin, Communities in Schools, Greenlights for NonProfit Success, and is an active member of the regional leadership group, Austin Area Research Organization.

“Independent, credit-worthy businesses are fueling the Texas economy today,” said Caballero. “Given the flexibility TXCDC has in financing growing companies, such as new tax credits, long-term and low-interest loans, I relish the opportunity to work with Texans hungry for new opportunity in today’s economy.”

TXCDC headquarters are in Austin with satellite offices in Dallas, Houston, San Antonio, Corpus Christi and Laredo. The company also formed Texas Community Development Capital (TXCapital), an entity which recently gained approval to loan $75 million in U.S. Treasury Community Development Financial Institutions Funds (CDFI) to help leverage federal tax credits (New Market Tax Credit Program).

“During her 30-plus years in banking, Suzanna has earned the respect of clients and lenders statewide,” said TXCDC Chairman Tovar. “She is a leader who is focused, smart and caring in equal parts with a genuine ethic for serving others, making her an ideal fit for our mission.