January 11, 2017
Best Practices: SBA Fine-tunes 504 Debt Refi Requirements
by Victor A. Diaz
Among a handful of changes recently announced by the SBA to the 504 Debt Refinancing Program is one allowing a Borrower’s debt to be refinanced despite a recent change of ownership. By means of a Policy Notice issued late last year, the SBA adopted changes to the permanent 504 Debt Refinancing Program requested by the industry. SBA Policy Notice 5000-1939. The recommendations came in the form of public comments to the Interim Final Rule published in the Federal Register last May. The changes are intended to provide further guidance in connection with the 504 Debt Refinance Requirements set forth in prior Policy Notice 5000-1382. The changes address various aspects of the program including the eligibility determination in cases where there has been a change in the ownership of the Borrower in the two years prior to application.
Under the permanent program requirements as originally outlined in Policy Notice 5000-1382, 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. If the ownership of the Borrower had changed, either partially or fully during the two year period, the Borrower was considered a new business and the Borrower’s debt was not eligible for refinancing under the 504 Debt Refinancing Program. Thus, for example, any change in the ownership of the Operating Company or Eligible Passive Company in the prior two year period precluded the Borrower from participating in the debt refinance program as it made the refinance de facto ineligible.
The guidance under the new Policy Notice relaxes the eligibility requirements in these instances and an intervening change of ownership is not a complete impediment to eligibility. Today, if the ownership of the Borrower has changed during this two year period, the CDC must follow the new business guidance in SOP 50 10 5 (H) and determine whether the Borrower is considered a new business, and document the justification for its determination in its credit memorandum.
SOP 50 10 5 (H), page 236, provides as follows:
“New Business is a business that is 2 years old or less at the time the loan is approved. A business that is more than 2 years old at the time the loan is approved may be considered a New Business if it is a change of ownership that will result in new, unproven ownership/management and increased debt unrelated to business operations. If there is a change of ownership, the CDC must review the management and level of debt and make a determination whether an additional borrower’s contribution of 5% is necessary.”
While this section of the SOP seems to address situations where a business that is more than 2 years old can still be considered a “new business,” the revised rule suggests that a change of ownership that occurred during the preceding 2 years may not necessarily render a business a “new business,” if the change did not result in an unproven business based on the new owner’s and management’s experience. Under this interpretation, if there has been a change of ownership of the Borrower during the two year period prior to application, the CDC must now review, analyze and take into consideration the impact of the change of ownership in the management and level of debt to the small business applicant in order to assess whether it should be deemed a new business or not for eligibility under the permanent refinance program. This case-by-case analysis will likely broaden the pool the of eligible applicants.
For more information on the new 504 Refinancing Program, please contact Victor at email@example.com or at 407-667-8811.