Commercial Loan Direct - Blog

Commercial Loan Direct - SBA Loans update
The SBA announced the ARRA 504 Loan Program Debt Refinancing interim final rule in today’s Federal Register [June 23, 2009, Volume 74, Number 119, page 29589-29592]. Debt refinancing as an eligible 504 Project Cost is a permanent change to the 504 Loan program, not just a temporary stimulus initiative.

This new debt refinancing authority will allow expanding small businesses to restructure qualified existing debt as part of new 504 loans. This will enable small business owners to free up critical capital to expand their businesses and create jobs.

The interim final rule is effective as of the date of publication – June 23 - and is a permanent change to the 504 program. A copy of the Federal Register Notice is attached or may be downloaded from http://edocket.access.gpo.gov/2009/E9-14886.htm. Also attached are SBA Policy Notice 5000-1108 with the changes to SOP 50-10(5)(A) for debt refinancing and SBA Information Notice 5000-1109 announcing that Version 2009.1 of the Authorization will be released. NADCO is coordinating with SBA to notify you as additional SBA Notices, the updated Authorization Wizard and revised SBA forms are released. Updates will be provided as they become available.

ARRA Debt Refinancing Eligible Project Costs and Program Restrictions

The following list is the conditions that a Project must meet to be eligible for debt refinancing:

1. Debt refinancing is available for 504 loan applications received by SBA on or after June 23, 2009. Those 504 loan applications received or approved prior to June 23, 2009 may be modified to include debt refinancing provided that the debenture has not been funded.

2. The 504 Project must include expansion of a small business. “Expansion” is broadly defined to include any Project that involves the acquisition, construction or improvement of land, building or equipment for use by the small business.

3. Qualified refinancing - the existing indebtedness to be refinanced may not exceed 50 percent of the Project Costs. The existing debt may consist of one or more loans and may be owed by an Operating Company, an Eligible Passive Company or both. Existing debt may include instruments that will result in transferring ownership of the property to the small business, including land sales contracts, contracts for deed or capital leases (but not operating leases). In addition, the existing indebtedness to be refinanced must meet the following conditions detailed in the new regulations and Notice 5000-1108, as follows:

1. The proceeds of the indebtedness to be refinanced were used to acquire land, including a building, to construct a building or to purchase equipment (that is, the assets acquired with the indebtedness to be refinanced must be 504 Project-eligible assets).

§ The debt being refinancing does not need to be for assets at the same location or for the same type of property as the 504 Project as long as the operation at the other location has the same NAICS code as the operation at the Project location.

§ An existing loan is disqualified from refinancing if it was used for working capital or any other purpose not eligible for 504 financing. However, where a portion of the existing loan was used for 504 Project-eligible assets, that portion is eligible for refinancing.

2. The existing indebtedness to be refinanced was incurred for the benefit of the same small business for which any new Project Costs are incurred. This includes existing 7(a) and 504 Loans or other loans from the Third Party Lender or CDC, as follows:

§ An existing 504 Loan must meet the conditions for qualified refinancing.

§ An existing 7(a) Loan may be refinanced in whole or in part only if the CDC provides verification that the present lender is either unwilling or unable to modify the current payment schedule. If the Third Party Lender or the CDC affiliate [as authorized under 13 CFR 120.852(a)] is the 7(a) lender, the 7(a) Loan will be eligible for 504 refinancing only if the lender is unable to modify the terms of the existing Loan because a secondary market investor will not agree to modified terms.

§ Only SBA may approve refinancing “same institution debt,” which means any debt of the CDC or Third Party Lender financing the new Project, or affiliates of either.

§ PCLP CDCs may not use their delegated authority to approve refinancing of same institution debt.

3. The existing indebtedness is collateralized by fixed assets with the following conditions:

§ The 504 eligible fixed assets collateralizing any debt to be refinanced, or relating to the portion of debt being refinanced in the case of a partial refinance, must also collateralize the 504 Loan unless SBA [the SLPC] approves a waiver due to extraordinary circumstances.

§ PCLP CDCs may not use their delegated authority to approve a 504 Loan requiring this waiver.

§ The lender of the existing indebtedness must release, subordinate or assign its lien on the 504 eligible fixed assets so that the Third Party Lender and/or SBA will maintain the same lien position on that collateral previously held by the lender whose debt is being refinanced.

4. The financing will provide a substantial benefit to the borrower when prepayment penalties, financing fees, and other financing costs are accounted for.

§ “Substantial benefit'' means that the portion of the new installment amount attributable to the debt being refinanced must be at least 10% less than the existing installment amount(s). Prepayment penalties, financing fees, and other financing costs must be added to the amount being refinanced in calculating the percentage reduction in the new installment payment.

§ Exceptions to the 10% reduction requirement may be approved by the Director, Office of Financial Assistance (D/FA) or designee for good cause,

§ PCLP CDCs may not use their delegated authority to approve a 504 loan requiring this exception.

5. The borrower has been current on all payments due on the existing indebtedness for not less than 1 year preceding the date of refinancing, as follows:

§ “Date of refinancing'' means the date that the 504 Loan is approved by SBA.

§ The CDC must submit a transcript of account or similar documentation containing detailed payment history from the lender whose debt is being refinanced reflecting that the loan to be refinanced has been current for one year (or for the time the debt has been open if less than one year).

§ Any unremedied delinquency after 504 Loan approval must be reported to SBA as an adverse change.

6. The refinancing will provide better terms or rate of interest than the existing indebtedness on the date of refinancing.

§ “Better terms or rate of interest” may include, but are not limited to, longer maturity (but always commensurate with the fixed assets' useful life), a lower interest rate committed on the Third Party Loan or projected on the 504 Loan, improved collateral conditions, or less restrictive loan covenants

7. The 504 Loan proceeds may not be used to refinance debt owed to the following:

§ An Associate of the 504 Loan applicant

§ An SBIC

§ Any creditor in a position to sustain a loss causing a shift to SBA of all or part of a potential loss from the existing debt.

4. Whether the new Project is within the CDC’s Area of Operations is based on the assets newly acquired for the small business and not on assets securing the debt being refinanced. If the assets being refinanced or any collateral securing the refinanced loan are outside the CDC’s Area of Operations, the CDC must establish that it is capable of closing and servicing the loan and monitoring the collateral.

o Non-PCLP CDCs must submit evidence to SBA (the SLPC) for approval that the CDC is capable of closing and servicing the loan and monitoring the collateral. PCLP CDCs must document the file with evidence of their capability.

5. For debt refinancing loan applications, CDCs must submit the following:

0. Non-PCLP CDCs must include, in the loan analysis, a conclusion that the proposed debt refinancing meets all the conditions and they must submit their supporting analysis and documentation as Exhibit 24 to the application. Documentation includes:

§ Copies of the debt and lien instruments for the debt being refinanced

§ The transcript of account or equivalent showing that the debt to be refinanced has been current for one year

§ If a 7(a) loan is being refinanced, verification that the existing lender is unwilling or unable to modify the current payment schedule

§ Evidence of the CDC’s capability of closing and servicing the refinanced loan and monitoring the collateral if outside the CDC’s Area of Operations.

1. PLCP CDCs will transmit the Eligibility Information Required for PCLP Submission (SBA Form 2234, Part C) to the SLPC, in which the PCLP CDC is required to address the conditions for debt refinancing. PCLP CDCs must maintain the analysis and al required documentation in the file.



Restrictions for PCLP CDCs

Not all 504 Loans that include refinancing can be approved under the authority delegated to PCLP CDCs. The following may not be approved under PCLP authority:

· waiving the requirement that the collateral securing indebtedness being refinanced must also secure the 504 loan

· approving a good cause exception that there be at least a 10% reduction in the new installment amount attributable to the indebtedness being refinanced

· refinancing same institution debt held by the same CDC or Third Party Lender financing the new Project, or affiliates of either

Keep in mind that this is an interim rule and that proposed changes are being requested and may be enforced at a later date.

CommercialLoanDirect.com

http://www.commercialloandirect.com

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