SBA 504 Expanded Refinancing Eligibility

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1 SBA 504 Expanded Refinancing Eligibility When is a commercial mortgage considered eligible for refinancing under the new rules? 1. The loan must have funded at least 2 years ago 2. 85% of the loan proceeds must have been used to acquire real estate or equipment 3. The property must be at least 51% owner-occupied 4. The loan cannot be a federally guaranteed loan (an SBA 7a, 504, first trust to a 504 or a USDA loan) 5. 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. Can a bank refinance its own conventional loan through the new 504 refinancing program? Yes! The lender must provide an inception to date payment history of the loan and the lender must certify that it has no knowledge of any default or indication of a pending default. Additionally, the TPL cannot sell the first trust 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 bank, SEDA-COG, and the borrower? 1. The bank will fund at least 50% of the appraised value 2. Business Finance Group will fund up to 40% through the 504 program 3. The borrower will contribute 10% in cash, existing equity in the asset, or through equity in additional collateral Can closing costs be included in the transaction? Yes, closing costs can be included. Can an expansion or improvement of the existing facility be included in the refinancing application? No.

2 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, 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 1.043% versus 0.749% for regular 504 loans 3. The bank will provide additional certifications to SBA that: The original use of proceeds for the loan was for eligible fixed assets The SBA 504 participation is essential to entice the lender to participate in the financing 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!

3 Example 1: Over-collateralized Refinancing Examples The value of the collateral securing the exceeds the outstanding principal balance of the debt. Lien is less than 90% of the appraised value. Third Party Loan $300,000 (50% of appraised value) SBA 504 Loan $200,000 (balance of existing debt-33.3%) Borrower Contribution $100,000 (all equity in -16.7%) Total $600,000 (100%) Example 2: Slightly over-collateralized Appraised Value of Property $540,000 The value of the collateral securing the 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. Third Party Loan $270,000 (50% of appraised value) SBA 504 Loan $216,000 (40% of appraised value) Borrower Contribution $54,000 (10% of appraised value: $40,000 equity and $14,000 cash) Total $540,000 (100%) Example 3: Under-collateralized The value of the collateral securing the is less than the outstanding principal balance of the debt. Existing lien exceeds the appraised value. No additional assets being injected in the. Third Party Loan $300,000 (50% of appraised value) SBA 504 Loan $240,000 (40% of appraised value) Borrower Contribution $60,000 (10% of appraised value) Total $600,000 (100%)

4 Example 4: Under-collateralized Appraised Value of Property $600,000 ( Property) Appraised Value of all Eligible Fixed Assets $900,000 ($600,000 Property + $300,000 additional Eligible Fixed Assets) The value of the collateral securing the is less than the outstanding principal balance of the debt. Additional assets are pledged which increase the size. Existing lien exceeds the appraised value. Borrower has additional Eligible Fixed Assets with Equity of $300,000 that will be included in the. Third Party Loan $450,000 (50% of appraised value of all assets) SBA 504 Loan $350,000 (38.9% to pay off existing debt) Borrower Contribution $100,000 (11.1%, all equity in ) Total $900,000 (100%) 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 greatly exceeds the outstanding principal balance of the debt to be refinanced to the point that there is no eligible debt refinancing. 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 exceeds the outstanding principal balance of the debt to be refinanced. While there is some potential refinance eligibility, it would be limited as follows: Third Party Loan $5,000,000 (50% of appraised value) SBA 504 Loan $1,000,000 (balance of existing debt) Borrower Contribution $4,000,000 (all equity in ) Total $10,000,000

5 Example 7: Over-collateralized with Other Eligible Costs In this Example, other eligible costs are included in the. This example is a modification of Example 1 with other costs added. The Borrower has sufficient equity to cover the required contribution. The inclusion of other eligible costs changes the structure slightly while allowing the maximum benefit to the small business. Other Eligible Costs $20,000 Total Costs $620,000 Third Party Loan $310,000 (50% of appraised value + other eligible costs) SBA 504 Loan $210,000 (balance of existing debt + other eligible costs 33.9%) Borrower Contribution $100,000 (all equity in 16.1%) Total $620,000 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. Example 8: Under-collateralized with Other Eligible Costs In this Example, the 504 participation is limited by the appraised value plus other eligible costs. This example is a modification of Example 3 with other costs now added. Note: in this Example, the total of the combined Third Party and 504 Loans is at the maximum of 90% of the appraised value plus other eligible costs. The Borrower will need to meet the required 10% contribution. The deficiency of $200,000 also will need to be addressed in one of the three ways discussed earlier. Other Eligible Costs $20,000 Third Party Loan $310,000 (appraised value + other eligible costs x 50%) SBA 504 Loan $248,000 (appraised value + other eligible costs x 40%) Borrower Contribution $62,000 (required contribution of 10%) Total $620,000