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Orlando Business Journal, Reprint

October 28 – November 3, 2011

The Small Business Administration has loosened its rules on a program that allows small firms that own commercial real estate to refinance their mortgages through the SBA’s 504 program.

Under the new rules, small businesses can use 504 refinancings to turn their real estate equity into working capital for their businesses. That could come in handy for small businesses that saw their lines of credit shrink following the financial crisis of 2008.

Using the 504 program to refinance commercial real estate loans also may be attractive to small businesses with high interest rates or impending balloon payments. Interest rates on 504 loans are at or near historic levels — in many cases under 5 percent, including fees.

Under the 504 program, government-guaranteed loans made by nonprofit certified development companies are paired with conventional loans. The loans must be used for fixed assets, such as commercial property or heavy-duty equipment. In fiscal 2011, which ended Sept. 30, the SBA approved 7,983 loans totaling $4.8 billion through the 504 program. Add in the conventional loans paired with 504 loans, and the program supported more than $10 billion in lending to small businesses.

In September 2010, Congress decided to allow small businesses to temporarily use the 504 program to refinance existing loans on owner-occupied commercial real estate. Borrowers can refinance up to 90 percent of their properties’ current appraised value, as long as they are current on their existing loans.

The SBA, however, initially restricted this new refinancing option to small businesses that faced balloon payments on their mortgages before Dec. 31, 2012. It lifted that time restriction in April 2011, but other rules kept the program from living up to its potential.

The inability to use 504 refinancings to obtain working capital disappointed many small business owners. The original rules also made small businesses with a lot of real estate equity ineligible for the program. Small businesses that had worked out loan modifications on their mortgages also were ineligible for 504 refinancing, and the SBA imposed difficult paperwork burdens on mortgages that had been refinanced several times before.

As a result of these restrictions, only 324 mortgages totaling $270 million had been refinanced through this 504 program as of Oct. 14. That compares to $7.5 billion that Congress had authorized for the 504 refinancing program during its first year.

“We left $7.2 billion sitting on the table last year,” said Chris Crawford, president of the National Association of Development Companies, which represents the nonprofits that make 504 loans.

Responding to these concerns, the SBA eased these restrictions Oct. 12. With these changes, the SBA estimates it will approve 8,250 refinancings through the 504 program over the next year. The refinancing program is scheduled to expire Sept. 27, 2012.

The relaxed rules “will certainly make it more attractive to small businesses,” Crawford said.

“This is a nice shot in the arm to the small business sector of the economy,” agreed Chris Hurn, president of Mercantile Capital Corp., an Altamonte Springs-based lender that specializes in 504 loans.

Hurn said his bank did “maybe a half-dozen” 504 refinancings through the old regulations, but expects to do “three or four dozen” under the new regulations. But he thinks the SBA’s estimate of 8,250 refinancings under the new rules is a little optimistic because some owners who were rejected for refinancings under the old rules may not come back.

“That’s the unfortunate thing,” Hurn said.

Crawford, however, said he is “really pleased the agency has finally gotten this thing out.”

“We worked real hard to get it through,” said Grady Hedgespeth, director of the SBA’s Office of Financial Assistance.

To some government officials, the idea of allowing small businesses to finance working capital over a long period of time sounded risky, he said. But he thinks these changes will make the SBA’s 504 loan portfolio stronger, because borrowers will become stronger businesses by locking in lower interest rates and using their real estate equity to restructure their balance sheets.