Limited Refinancing Now Available in 504 Projects
On June 23rd, SBA published the long awaited regulations allowing limited refinancing when a small business is expanding by acquiring, constructing or improving real estate or equipment. The intent of the bill was to keep the bank’s loan to value at a reduced level (and hence reduce the bank’s risk) when a small business is expanding a property which has pre-existing debt. Preexisting debt, up to 50% of new project costs, can be added to the new project costs while the bank retains the remaining 50% in a first trust position. The pre-existing debt must have been used for 504 eligible costs, and the borrower must have been current on the loan for the last 12 months. Additionally, the revised debt must demonstrate a 10% savings over the pre-existing debt as well as improved terms for the borrower. Both existing 504 and 7a loans are eligible to be refinanced. We are working closely with our trade association to iron out the details of the regulations as we process applications under the new rules.
Two examples of project structures follow:
The small business has $500,000 of preexisting mortgage debt and plans to spend $1,000,000 expanding the property. The sources and uses of funds are:
504 Project Costs |
| Preexisting Debt |
$500,000 |
| New Project Costs |
1,000,000 |
| Total 504 Project |
$1,500,000 |
Sources of Funds |
| Bank |
$750,000 |
| 504 Loan |
600,000 |
| Equity |
150,000 |
| Total |
$1,500,000 |
If the small business were only planning to spend $500,000 expanding the property, the sources and uses of funds would change as follows:
504 Project Costs |
| Preexisting Debt |
$250,000 |
| New Project Costs |
500,000 |
| Total 504 Project |
$750,000
|
Sources of Funds |
| Bank |
$375,000 |
| 504 Loan |
300,000 |
| Equity |
75,000 |
| Total |
$750,000 |
*The bank’s first trust would total $625,000 ($250,000 of the preexisting debt that was not included in the 504 project costs plus $375,000 or 50% of the 504 project costs).
July Fundings
BFG funded seven loans totaling $8.8 million in the July Bond sale. We thank all of the participating banks which included BB&T, Cecil Bank, Centra Bank, MainStreet Bank, Rockingham Heritage Bank, Union Bank & Trust Company, Virginia Commerce Bank, and Virginia Heritage Bank for their support! Borrowers included 4 medical practices, a hotel, a retailer, a manufacturer, and a gas station. As a result of the 504 loans, 123 much needed jobs are expected to be created or retained over the next two years.
Closing Tip
While the bank is funding the 504 project during a renovation or construction phase, please keep in mind that SBA must also approve any changes to loan amounts. Please let us know that the project and/or loan amounts are changing so that we can submit changes to SBA in a timely manner!
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