Refinance FAQ

When is a commercial mortgage considered eligible for refinancing under the new rules?

• The property must have been acquired a minimum 2 years ago and financed with debt. The age of the existing debt is irrelevant and in fact, the property could have been previously refinanced multiple times.
• 85% of the original loan proceeds must have been used to acquire real estate or equipment
• The property must currently be at least 51% owner-occupied
• The loan cannot be a federally guaranteed loan (an SBA 7a, 504, first trust to a 504 or a USDA loan)
• The loan must have been current for the last 12 months

What happens if one or two loan payments were made a few days after the due date?

If no loan payments were made more than 30 days beyond the due date, the loan is considered to have been current for the 12 month period. If the loan payment schedule was modified and the modified payment schedule is current, the loan will qualify.

Can a bank refinance its own conventional loan through the new 504 refinancing program?

Yes! The (Third Party Lender – TPL) must provide an inception to date payment history of the loan and the TPL must certify that it has no knowledge of any default or indication of a pending default. Additionally, the TPL cannot sell the first trust loan into the secondary market.

In the 7a program, there must be a “substantial benefit” to the borrower. Is such a test required for the 504 refinancing?

No.

How will the refinancing dollars be split between the Third Party Lender , Business Finance Group and the borrower?

Like in the regular 504 loan program, the TPL first trust loan cannot exceed the BFG 504 second trust loan. In a cash-out refinancing situation, the TPL loan will be 50% of appraised value, while the BFG 504 loan will be 40% of the appraised value, and the borrower’s 10% contribution is the remaining equity in the project property.

1. The bank will fund at least as much as the BFG 504 portion of the project.
2. Business Finance Group will fund up to 40% through the 504 program.
3. The borrower will contribute a minimum 10% in cash, existing equity in the project property, or through equity in additional collateral.

Can closing costs be included in the transaction?

Yes, closing costs can be included.

What are “eligible business expenses”?

1. Eligible Business Expenses include items such as
   1. building repair and maintenance costs (paint, carpet, roof, etc.)
   2. utility bills
   3. rent
   4. salaries
   5. inventory
   6. pay down/off business line of credit
2. Expenses must have been incurred prior to date of 504 application or must be due within 18 months of 504 application

Can an expansion or improvement of the existing facility be included in the refinancing application?

No. However, eligible business expenses can be included in the project if the appraisal is high enough (cash out for working capital and other eligible business expenses up to a maximum 90% loan to value – LTV).

If the appraised value is less than the total of the new financing (90% of FMV), how is the remaining loan balance handled?

The borrower can provide additional collateral. If the equity in the additional collateral reduces the total LTV to 90%, no cash contributions are required. The bank’s loan amount will be based on 50% of the appraised value of all assets in the collateral pool.

1. The lender can forgive the excess debt
2. The borrower can pay the difference in cash
3. The lender can finance the difference in 3rd trust position

Is there an additional equity requirement for special use assets (i.e., hotels, car washes, etc.) or start-up businesses?

No. A business must have been in operation for 2 years in order to be eligible for the refinancing program. The additional down payment requirement for special use assets only applies to regular 504 loans.

What are the job requirements for the refinancing program?

If economic development goals of the 504 program other than jobs are not met, then we look at retention of the existing jobs as the economic development impact of the 504 involvement.

Are there any differences in the application processes between the refinancing program and the regular 504 program?

1. There are several differences. First, as an appraisal will be required at the time of application to establish the Fair Market Value* and allocate the loan amounts between the lenders.
2. The SBA guarantee fee (included in the interest rate the borrower pays) will be slightly higher at
   1. 103% versus 0.9375% for regular 504 loans
3. The bank will provide additional certifications to SBA:
   1. The use of proceeds for the original loan was for eligible fixed assets
   2. The SBA 504 participation is essential to the entice the lender to participate in the financing
   3. The lender is not aware of any prior or pending defaults.

Does the bank pay the 1/2 point SBA fee on the first mortgage?

Yes, we will collect the 1/2 point bank fee at the 504 closing.

Are there any differences in the closing and funding process?

A very important change is the term of the SBA Authorization for Debenture Guarantee (commitment document). The term is only 6 MONTHS versus the 48 month term for a regular 504 loan. Extensions will not likely be granted! It is very important that the 504 portion CLOSE IN TIME TO FUND BEFORE THE 6 MONTH TERM EXPIRES!

*An appraisal will be required to establish the Fair Market Value of all the assets

Lenders should note that the SBA commitments will have only a 6-month term, thus prompt CDC closings are essential. Business Finance Group has an experienced closing staff of four and seven designated attorneys to help move loans through to funding in a timely manner.