Benefits of 504 Refi

Spread the Word About 504 Refinancing

by Chris Hurn, CEO/Cofounder – Mercantile Capital Corporation

Chris Hurn, CEO & Cofounder of Mercantile Capital Corporation

By now, you likely know that several changes were made to U.S. Small Business Administration (SBA) loan programs this past September with the passage of the Small Business Jobs and Credit Act. You may not realize, though, that one of the most-significant changes is the two year provision that allows small-business owners to use SBA 504 loans to refinance commercial real estate and other eligible fixed assets.

By refinancing their commercial mortgage with a 504 loan, business-owners can re-amortize their commercial property term, as well as take advantage of historically low interest rates.

The SBA 504 loan program is the best-kept secret in commercial property financing, but it offers the largest cash-on-cash return financing available, along with below-market, long-term fixed interest rates and longer amortizations. The opportunity to use these loans for refinancing is a great one for business-owners, as well as commercial mortgage professionals who work with SBA loans.

A second chance

Let’s consider the story of a business owner named Fred. A few years ago, Fred decided to buy the property his business occupies. By doing so, he would turn his monthly lease payments into mortgage payments that would build equity. This decision made great business sense, so he went ahead with it. With a loan from his commercial bank, Fred purchased the property.

Fast-forward to the present: Fred is facing a ballooning note payment. If he could refinance and take advantage of low interest rates, he might be able to cut his expenses enough to stay afloat or pull out some of the equity he has in the property. He can’t find any bank that will do it conventionally, however. Today’s tighter underwriting standards have made it increasingly difficult for borrowers like Fred to qualify with most banks.

Fred’s story is fictional, but many real business-owners today face a similar situation. To make matters worse, their initial down payments on their conventional loans were two to three times greater than what they would have been if they’d used a 504 loan the first time around. The SBA is giving these business owners the chance to get some of their capital back by refinancing as much as 90-percent loan-to-value and as much as 125 percent with additional collateral pledged. This is a major benefit for some challenged owners of small and midsized businesses.

Click here to see a printer-friendly list of guidelines for

our SBA 504 Refi Program.

The perfect tool

In addition to its beneficial terms for small business borrowers, the SBA 504 program is a zero-subsidy program. In other words, it does not cost taxpayers anything. Program fees have carried it for years without any federal subsidy, and the program has run such a surplus at times that the government redirected some of these funds for entitlement spending a few years ago. In addition, the loan-loss rate is historically about one-third that of the 7(a) program — the SBA’s other flagship loan program, which has allowed refinancing for some time.

From the taxpayer’s perspective, 504 refinancing is a better deal, and you benefit as well. The 7(a) is mostly a floating-rate loan program — which isn’t the best option for long-term, hard assets like commercial property — and often requires additional collateral. This additional collateral often takes the form of a second lien on your home or liens against inventory and receivables. This ties up those assets and can ultimately be problematic if you later need a line of credit or other short-term financing. By making 504 refinancing possible, the SBA is doing a world of good for many small medical practices.

Some critics will argue that this provision will only cause business-owners to use their commercial real estate like an ATM, much like homeowners did in the recent credit boom. But that analogy doesn’t apply here. Small businesses historically create the lion’s share of jobs in the U.S. Many small-business owners have cut expenses and have leveraged up to stay in business during an economically difficult period. In addition, entrepreneurial physicians like you typically make decisions to maximize profits and grow your business — not to spend recklessly.

Larger implications

There’s one other thing you should know, something that’s an indirect benefit to you. This refinance provision also helps banks. It’s no secret that banks are being forced by their regulators to increase their capital, lower their risks and generally strengthen their balance sheets. In many cases, that means reducing their exposure to commercial real estate. If you approach your bank to refinance your commercial mortgage into a 504 loan, you might just be doing your banker a huge favor. And working with a lender who specializes in 504 lending without requiring any change in your banking relationship will lessen any perceived threat in this situation.

If you’ve purchased commercial property for your business at least two years ago, you ought to look into refinancing now with an SBA 504 loan. Even if you haven’t purchased property, you probably know someone who has. Pass this information along to them because this opportunity just might make their year.

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