SBA 504 Loan Pro gram Up dateby G ar y M olenda • published in the Januar y 2011 issue

It’s no secret that commercial property values, much like homes, have declined significantly in the last few years. Although not usually thought of in the same way, many small businesses are in the same boat as homeowners facing foreclosure. Because many types of commercial mortgages mature in five to seven years,

banks and borrowers alike are facing a challenge.

Traditionally, borrowers simply refinanced the mortgage debt. But with property values in the tank and banks tightening lending standards, some analysts are forecasting a wave of foreclosures and write-downs on commercial property. The Oakland, Calif.-based research firm Foresight Analytics forecast 49 percent of commercial mortgages maturing in 2011 will be “underwater”—with negative equity—with a whopping 63 percent of those maturing in 2012 also in that category. In all, it said, some $770 billion in commercial loans with balances greater than their collateral value will come due in the next few years.

With passage of the Small Business Jobs and Credit Act of 2010 in September, significant changes were made to the lending programs offered by the U.S. Small Business Administration to help cope with the situation.

For Tucson’s small business owners, perhaps the most important provision is a change to the SBA’s 504 Certified Development Company loan program, which are used to finance the purchase of real estate and other fixed assets. Under the change, small business owners will now for the first time be able to use the low-interest, fixed rate SBA 504 loan to refinance existing commercial mortgages.

This is how it will work: Participating commercial lenders will be able to refinance their customers’ existing mortgages with the same structure now applicable only for new loans—a 50 percent bank first mortgage combined with a subordinated 40 percent SBA-504 loan and 10 percent borrower equity. While the detailed SBA regulations on how the new provisions will work have not been released, the new law establishes the following requirements for refinancing what is described as “qualified debt”:

To be qualified debt, the indebtedness must:

• Have been incurred not less than two years prior to the date of the refinance application• Be a commercial loan and not subject to any Federal guarantee• Have been used to acquire fixed assets which would have been eligible for financing under the regular

504 program and these assets provided to the lender as collateral• Have been current for at least the past year before applying for refinancing

Business Development Finance Corporation believes there will be strong demand for the SBA 504 refinance loan because it addresses the needs of both the lenders and the borrowers in these tough times. Many banks like it because it gives them a 50 percent loan-to-value ratio rather than a 75 or 80 percent LTV, and small business owners get the peace of mind that they have a fixed rate, long-term solution.

BDFC is accepting applications today in anticipation of receipt of final SBA regulations, expected to be released in the 1st quarter of 2011.

Gary Molenda is president of Business Development Finance Corporation, a private, non-profit corporation dedicated to economic development by providing affordable financing for Arizona businesses. He can be reached at (520) 623-3377 or via email at gmolenda@bdfc.com.

Tucson Real Estate + New Development

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