How to Refinance Commercial Loans Secured By Real Estate and Equipment through the SBA 504 Program

Lerch, Early & Brewer's Legal Update

The U.S. Small Business Administration recently enacted rules that permit small business owners with loans maturing between now and December 31, 2012 to refinance qualifying loans through the SBA 504 Program. In order to qualify, the following requirements must be satisfied:

  • The existing loan must have closed and funded at least two years ago;
  • 85% of the loan proceeds must have been used to acquire real estate or “big ticket” equipment;
  • The property must be at least 51% owner-occupied;
  • The loan being refinanced must not have been a federally guaranteed loan (an existing SBA loan); and
  • The loan must have been current for the last 12 months.

Under the SBA 504 Program, a bank makes a loan to a borrower, and a certified development company (a “CDC”) makes a subordinate SBA guaranteed loan. The typical structure contemplates that the bank will make a loan equivalent to 50% of the appraised value of the property, the CDC loan will be in the amount of up to 40% of the appraised value of the property and the borrower will contribute 10% in cash, existing equity in the property or other collateral. Until these rules were enacted, banks were not permitted to refinance existing loans.

Borrowers must satisfy other requirements as well. One significant requirement is that the borrower must be able to demonstrate that all of the funds being refinanced were used for purposes that the SBA considers “eligible fixed assets.” In most instances, if the transaction is a refinance of an acquisition loan, the requirement can be satisfied with the settlement sheet from the prior closing. In other instances, the borrower may have to research old financial records to satisfy the requirements. Additionally, the property will have to be appraised to demonstrate the fair market value of the property, as this is necessary to allocate the loan amount between the bank making the first mortgage loan, the CDC and the borrower.

Because the loan is guaranteed by the SBA, borrowers must strictly adhere to the requirements. This means, for instance, no payments can have been late by more than 30 days beyond any payment due date or the loan will not be considered “current” and eligible for the program.

The program is extremely advantageous for an eligible borrower. A borrower need not satisfy the “substantial benefit” test that ordinarily applies to SBA 504 loans. With the new SBA loan limits, borrowers may refinance projects of up to $10 million under this program. The borrower can finance eligible closing costs (the SBA regulations specify what closing costs are eligible), and a wise borrower will work closely with an experienced banker to structure a transaction properly.

If a borrower has an eligible loan, it is best to proceed expeditiously. Although the program is available through December 31, 2012, there are limited funds committed. Moreover, no one knows how Congress will treat the program in the upcoming budget process. We can assist in the introduction to lenders and, also, in evaluating whether a loan is eligible for the program.

Arnie Spevack is an attorney at Lerch, Early & Brewer who represents businesses, lenders and borrowers in financings, closings, negotiations and in the courts. For more information on refinancing loans through the SBA 504 program, contact Arnie at or (301) 657-0749.

This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.


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