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June 29, 2016

Best Practices: Permanent 504 Refinancing Program

by Victor A. Diaz

The long awaited 504 Debt Refinancing Program launched on June 24, 2016, after expiration of the comment period for the interim final rule published in the Federal Register on May 25, 2016. The interim final rule implements sections of the Consolidated Appropriations Act of 2016, which authorized SBA financed projects to include the refinancing of qualified debt on a permanent basis. In addition to all applicable 504 loan program requirements, refinancing under the 504 Loan Program is subject to new statutory and regulatory procedures.

There are a total of three statutory modifications to the 504 Debt Refinancing Program

  1. The refinancing program will be available only in those years where the subsidy cost to the federal government of making guarantees under the entire 504 program is zero;
  2. The dollar amount available to each CDC for debt refinance in any fiscal year cannot exceed 50% of the dollars the CDC loaned under the 504 Loan Program during the previous fiscal year; and
  3. All refinancing projects must satisfy the job creation and retention requirements that apply to any 504 Project

In addition to the statutory changes, implementation of the 504 Debt Refinancing Program required modification to the current 504 Loan Program Rules codified at 13 CFR 120.882(g). While a substantial portion of the regulatory revisions were aimed at eliminating the requirements of the temporary 504 debt refinance under the Small Business Jobs Act of 2010, others created additional requirements. Of note are the inability of the Permanent Lender to sell the Third Party Loan on the secondary market as a part of a pool guaranteed when the debt being refinanced is same institution debt; and, clarification of “current on all payments due” to mean that no payment was more than 30 days past due from either the original payment terms or modified payment terms (including deferments) if such modification was agreed to in writing by the Borrower and the lender of the existing debt not less than one year preceding the date of application.

Beyond the statutory and regulatory changes, the Agency announced additional procedures affecting the 504 Refinancing Program in SBA Policy Notice 5000-1382. The notice outlines additional, straightforward eligibility requirements. For instance, a Borrower must have been in operation for all of the two year period ending on the date of application, as evidenced by the financial statements submitted at the time of application. And, in the event the ownership of the Borrower has changed, either partially or fully during the two year period, the Borrower is considered a new business and the Borrower’s debt is not eligible for refinancing under the 504 Debt Refinancing Program. Other documentation requirements are also straightforward such as the need for a credit memorandum, payment history transcripts, appraisals, etc.

The balance of the eligibility requirements are less straight forward, and their examination in detail is beyond the scope of this article. For example, while all refinancing under the 504 Debt Refinancing Program must include “Qualified Debt,” which includes “Eligible Fixed Assets,” the refinancing may also include “Eligible Business Expenses.” Eligible Business Expenses, in turn, can include “Other Secured Debt” or “Business Operating Expenses.” Sorting out the various eligible assets such as land, buildings, machinery, and equipment, and other non traditional 504 project costs such as business expenses in the nature of salaries, rent, utilities, and inventory, and their respective loan-to-value limitations, will present challenges for lenders.

For more information on the new 504 Refinancing Program, please contact Victor at vdiaz@starfieldsmith.com or at 407-667-8811.