Small Business AdministrationrnOffers Rare Refinance Chance (Opinion)

Are you looking to refinance your maturing commercial real estate debt?

If so, thanks to the Small Business Jobs Act of 2010, there is a 19-month window to refinance owner-occupied commercial real estate debt with an SBA 504 loan.

For the first time in the history of the Small Business Administration, this legislation enables 504 loans to be used for the refinancing of qualified existing debt without the need for the business to expand and create jobs. In other words, pure refinancing into a loan vehicle with no balloon or demand features and an attractive 20-year fixed interest rate on a significant portion of the debt.

Current market research indicates a large percentage of commercial real estate mortgages outstanding — particularly those held by community banks — are set to mature within the next few years. In our current economic climate, businesses may find it difficult to renew maturing loans, even when the business has performed as agreed, due to declining real estate values.

For the first time, small- to middle-market business borrowers can refinance their maturing fixed-asset loans with long-term, true amortizing financing. This structure is a clear win-win situation for all parties involved.

The business owner secures long-term financing with a significant portion at an attractive fixed interest rate, and the bank is able to mitigate its risk associated with declining real estate values. 

The qualifying parameters are:  

• Debt must be maturing on or before Dec. 31, 2012.

• Debt was incurred two or more years ago. 

• Debt is not currently subject to any federal agency guarantee. 

• Debt was used to acquire 504-eligible fixed assets.

• Debt is collateralized by 504-eligible fixed assets. 

• Borrower has been current on all payments for at least a year.

• Amount of refinancing (both bank and SBA 504) is not more than 90 percent of the current appraised value of the fixed asset collateral (otherwise, additional collateral or cash may be required to cover the deficiency). 

• Borrower has been in operation for two or more years.   

This recent change to the SBA 504 loan program is a rare opportunity.

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. It is not possible to cash out of any equity position in the real estate through the 504 loan structure.

It will definitely help many businesses in Arkansas whose owner-occupied commercial real estate loans will be maturing in the near future.

Typically, a 504 project includes three elements:

1. A first mortgage loan from a bank covering up to 50 percent of the project cost.

2. A second mortgage loan from an SBA Certified Development Company covering up to 40 percent of the project cost.

3. A 10-percent contribution from the business borrower. 

Congress authorized the SBA to approve up to $15 billion in loans under this program ($7.5 billion in both fiscal years 2011 and 2012).

Together with the first mortgage, this temporary refinancing program should provide up to $33.8 billion of total project financing. This is expected to benefit about 20,000 businesses nationwide.  

Compared with the total number of small to medium-sized businesses, demand will likely outstrip supply.

As usual, the early bird will get the worm. The 504 refinance opportunity expires on Sept. 30, 2012. 

Jay Wisener is executive vice president of Arkansas Capital Corp. Group, and Al Hodge is senior vice president.