SBA offers mortgage refinancing

Small businesses facing sizeable balloon payments as property loans mature will be able to refinance commercial mortgage debt through a temporary program that the U.S. Small Business Administration has set up to address sluggish economic conditions and reduced real estate values.
The program is a welcome one for businesses that have been looking for a way to refinance their mortgages – not allowed under usual SBA regulations – so “everybody is happy that this program finally came out, but there are some special restrictions,” said Paula Botelho, vice president of the South Eastern Economic Development Corp., based in Taunton.
Those restrictions, Botelho said, include but are not limited to requirements that: The debt to be refinanced must be outstanding for at least two years; at least 85 percent of the debt was used to acquire, construct or improve SBA-eligible fixed assets; no existing SBA 504 loans can be refinanced; the business must be in operation for at least two years; and a new, independent appraisal must be done within six months of applying.
Botelho reported “mixed” reaction to the program from private-sector lenders. “The bankers were hoping the program would consist of straight debt-refinancing, but the SBA in the first round is opening it up only to commercial mortgages maturing on or before Dec. 31, 2012,” she said.
“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 Karen Mills, SBA administrator in Washington, D.C.
Even businesses that are performing well and making payments on time “could face foreclosure because of the difficulties they face in refinancing and restructuring mortgage debt,” Mills said in a prepared statement. “This temporary program is another tool SBA can provide to help these small businesses remain viable and protect jobs.”
The SBA estimates that 20,000 small businesses across the country are eligible to benefit from the new program, which officially began Feb. 28 when the SBA began accepting applications for it. It runs through Sept. 27, 2012.
The SBA is initially offering the program to businesses in immediate need due to impending balloon payments before Dec. 31, 2012, but may revisit it later to accommodate other demonstrated needs. Congress, through the Small Business Jobs Act, authorized the SBA to approve up to $15 billion in loans for this temporary measure, $7.5 billion in each of fiscal years 2011 and 2012. The SBA noted that a key feature of the program is that it does not require expansion of a business. Botelho explained that up to 90 percent of a property’s fair market value can be refinanced in the traditional three-way financing used for SBA 504 loans, which would include at least 10 percent equity from the borrower, 50 percent from a private-sector lender and 40 percent from the SBA or an approved lender such as SEED. The SEED agency currently offers 5.9 percent fixed interest rates.
Mark S. Hayward, district director of the Rhode Island office of the SBA, called the temporary program a “once-in-a-lifetime opportunity” for business owners and he urged local businesses to consider taking full advantage of it. He reported a “great deal” of interest in it already.
“I call this program, ‘Window to Wall Street for Small Business’ because it gives small businesses the ability to borrow money” at the kind of rates only large industries can enjoy, Hayward said, citing interest rates as low as 4 or 5 percent depending on the nature of the transaction.
“This is the first and only opportunity we have to refinance existing debt,” Hayward said. His office is encouraging lenders to review their clients’ portfolios and to begin applying for the refinancing funds for those clients facing balloon mortgage payments over the next two years.
Other details of the program, according to information from the SBA in Providence and SEED, include:
• Eligible refinancing costs can be part of the transaction;
• Loans to be refinanced must be current;
• Unlike regular 504-loan requirements, expansion of the business is not needed to qualify.
• Loan proceeds cannot be used for other business expenses beyond refinancing.
• As is the case in other 504 loans, a senior lien with a private lender and a junior lien or second mortgage with the SBA or SEED, backed by a 100 percent, SBA-guaranteed debenture. •