|
An Important Refinancing Tool for Community Lenders A vital source of refinancing for your existing owner occupied commercial real estate loan clients. 2 Year Temporary Refinance Program
• The Small Business Jobs Act-became law September 27, 2010 • Allows the 504 loan program to be used for 2 years to refinance qualified debt • Congress has provided $7.5 billion each fiscal year for refinancing existing debt • The small business must have been in operation for not less than 2 years prior to the Date of application • “Date of application” is the date that the complete 504 Loan application is received by the SLPC • The small business also must have been in operation during all of the 2 years prior to Date of application • The debt cannot have any 30 day late payments in last 12 months. Borrowers are deemed current as long as no payment was more than 30 days past due under either the original payment terms, or under modified payment terms - including deferments - during the 12 month period prior to the date of the 504 Loan application. • The Refinancing Project can consist of: • Refinanced Debt • Professional Fees • Points, fees and interest on Interim Loan Renovation or build out of the existing facility • Any expense incurred by the small business which is now due and payable or will become due and payable within 18 months of the 504 Loan application The debt to be refinanced must be: • Incurred not less than 2 years prior to the Date of application • 100% incurred for the benefit of the small business • Substantially all (85% or more) of the loan proceeds were used for 504-eligible purposes and 100% of the loan was incurred for the benefit of the small business • Secured by 504-Eligible Fixed Assets • A debt is not eligible to be refinanced if it is: • A loan with a federal guarantee (e.g., 504, 7(a) or USDA loan) • A Third Party Loan on an existing 504 Project • Debt owed to an Associate of the borrower • Debt owed to a Small Business Investment Company (SBIC) • Debt owed to a New Markets Venture Capital Company • A debt where the creditor is in a position to sustain a loss and refinancing would cause a shift to SBA of all or a portion of that potential loss • SBA requires that neither BDFC nor a Third Party Lender have any knowledge of a default by the borrower or any knowledge or information that indicates a default is likely • Borrower must be current on payments for not less than 1 year prior to Date of application. Borrowers are deemed current as long as no paymnet was more than 30 days past due under either the original payment terms, or under modified payment terms - including deferments - during the 12 month period prior to the date of the 504 Loan application. • BDFC must submit an independent appraisal at application supporting the fair market value of the fixed assets being refinanced and any other fixed assets offered as collateral (whether commercial or residential) • The appraisal must be dated within 6 months of the Date of application • Funding for the Refinancing Project must come from 3 sources based on the current fair market value of the fixed assets serving as collateral plus other eligible costs: • Third Party Loan – First lien must be at least as much as the 504 loan • SBA 504 Loan – not more than 40% • Borrower – not less than 10% • This is a big difference from regular 504 loan structuring! If the amount of permissible refinancing is not sufficient to repay the entire amount owed on the Qualified Debt, there are 3 options for what the existing lender of the Qualified Debt may do: • Forgive all or part of the deficiency – This may have tax consequences for the borrower • Accept payment from borrower for all or part of the deficiency • Accept a new note for the balance or deficiency which must be subordinate to the liens securing the Third Party Loan and 504 loan SBA will determine what effect, if any, the disposition of the deficiency has on the borrower’s creditworthiness and may place additional restrictions on the remaining debt • For example: SBA may require that the subordinated debt held by the existing lender be placed on standby for 3 years • Borrower contribution may be satisfied by: • Cash AND/OR • Borrower’s equity in the Eligible Fixed Asset(s) serving as collateral for the Refinancing Project AND/OR • Borrower’s equity in any other fixed assets acceptable to SBA as collateral, provided there is an independent appraisal of the fair market value of those assets • Unlike expansion debt refinancing, borrower’s equity in equipment, established by appraisal, may be contributed • When a fixed asset serving as collateral is a limited or special purpose property, borrower will not be required to increase its contribution to 15% (as would be required in a regular 504 project) because the sole purpose of the 504 Loan is refinancing • If the outstanding principal balance of the Qualified Debt is more than 90% of the current fair market value of the Eligible Fixed Assets collateral, SBA will permit borrower to contribute equity in other fixed assets acceptable to the SBA as collateral in order to increase the amount of the Refinancing Project • Acceptable “other fixed assets” may be: • Any other 504-eligible fixed assets • Any other commercial property • A personal residence • Equipment • The Same Institution Third Party Lender must certify in its commitment letter that it has no knowledge of a default by borrower and has no knowledge or information that indicates a default by borrower is likely • The Third Party Loan cannot be sold on the secondary market as part of a pool of guaranteed loans - Example 1: Over-collateralized Appraised Value of Property $ 600,000 Outstanding Balance of Debt $ 500,000 The value of the collateral securing the Project exceeds the outstanding principal balance of the debt. Lien is less than 90% of the appraised value.
- Example 2: Slightly over-collateralized Appraised Value of Property $540,000 Outstanding Balance of Debt $500,000
The value of the collateral securing the Project is greater than the outstanding principal balance of the debt. Lien is slightly greater than 90% of the appraised value. No additional assets are being injected into the Project.
- Example 3: Under-collateralized Appraised Value of Property $600,000 Outstanding Balance of Debt $800,000 The value of the collateral securing the Project is less than the outstanding principal balance of the debt. Existing lien exceeds the appraised value. No additional assets being injected in the Project.
- Example 4: Under-collateralized Appraised Value of Property $600,000 (Project Property) Appraised Value of all Eligible $900,000 ($600,000 Project Property + Fixed Assets $300,000 additional Eligible Fixed Assets) Outstanding Balance of Debt $800,000 The value of the collateral securing the Project is less than the outstanding principal balance of the debt. Additional assets are pledged which increase the Project size. Existing lien exceeds the appraised value. Borrower has additional Eligible Fixed Assets with Equity of $300,000 that will be included in the Project.
- Example 5: Excessively Over-collateralized Appraised Value of Property $1,000,000 Outstanding Balance of Debt $400,000 The value of the collateral securing the Project greatly exceeds the outstanding principal balance of the debt to be refinanced to the point that there is no eligible debt refinancing Project. The Third Party Loan requirement of $500,000 ($1,000,000 x 50% = $500,000) exceeds the outstanding debt and there is no eligibility for refinancing under the temporary debt refinancing program. - Example 6: Very Over-collateralized Appraised Value of Property $10,000,000 Outstanding Balance of Debt $6,000,000 The value of the collateral securing the Project exceeds the outstanding principal balance of the debt to be refinanced. While there is some potential refinance eligibility, it would be limited as follows:
- Example 7: Over-collateralized with Other Eligible Costs Appraised Value of Property $600,000 Other Eligible Costs $ 20,000 Total Project Costs $620,000 Outstanding Balance of Debt $500,000
• In this example, 504 participation is limited by the balance of the outstanding debt. • NOTE: The total of the combined Third Party and 504 Loans still does not exceed 90% of the appraised value. Consequently, we are able to include other eligible costs. • Borrower contribution, through equity, still exceeds the 10% minimum. • We have the authority to make decisions on behalf of the SBA and we work quickly to get results. • BDFC offers you have a team of specialists on call at all times. • Our core value of “No Surprises” means we communicate with you early and often. • From the application process, to close of escrow through debenture funding, we collaborate with all parties involved to ensure a smooth closing process...on your schedule. • Arizona lenders consistently choose BDFC as their CDC partner. Experience the BDFC difference! • You don’t have to be an expert, let BDFC become your personal SBA department! • Do more deals • Eliminate looming balloon deadlines • Refinancing will reduce your risk and exposure • Gives you the option to retain valuable customers and deposits |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||