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July 13, 2011

Firm News for July 2011: New Fixes To The SBA 504 Temporary Debt Refinancing Program

By: Janet M. Dery, Esq.

On June 20, 2011, the U.S. Small Business Administration (the “SBA”) issued SBA Procedural Notice 5000-1212 (the “Notice”) to provide additional guidance on certain facets of the SBA 504 Temporary Debt Refinancing Program (the “Program”). Originally enacted on September 27, 2010, the Program was created to assist those small businesses whose debt would mature in the near future and who had no resources for refinancing. As proponents of the Program know, the Congressional objective was for $7.5 billion to be loaned under this Program in the current fiscal year. To date, the amount of loans applied for and closed under this Program is well below the budgeted amount. Any unused funds at the end of the fiscal year will be lost.

The most important change to the Program is that an appraisal no longer needs to be submitted with the application. Instead, the Certified Development Company (the “CDC”) may include an estimate of the value of the collateral that will be securing the project, and then, prior to loan closing, submit an independent appraisal of the collateral for SBA approval. The SBA, upon review of the independent appraisal, can then determine if the project needs to be restructured. The benefit of this Program change is that the expense of obtaining an appraisal can be postponed until after the loan has been approved by the SBA, instead of requiring a significant up-front expenditure with no certainty of loan approval.

The Notice also clarifies that multiple commercial loans may be considered “Qualified Debt,” which is debt that is eligible to be refinanced. Prior to the issuance of the Notice, many lenders assumed that “Qualified Debt” could only be a single commercial loan. The SBA qualified this clarification, stating that each commercial loan must separately satisfy the statutory and regulatory requirements for “Qualified Debt,” which requirements include: (1) 85% or more of the proceeds of such loan must have been used for 504 eligible purposes; (2) it must have been incurred not less than two years prior to the date application is received by the SBA; (3) it must have been current for the past year with no payment being deferred or past due for more than 30 days; and (4) borrower can show that it meets the job creation or other economic development objectives set forth in 13 CFR ยง120.861-120.862 or that borrower currently has one full-time job or full-time equivalent job per $65,000 borrowed through the debenture.

Lastly, the Notice states that the Center Director of the Sacramento Loan Processing Center (the “SLPC”) has delegated authority from the Director, Office of Financial Assistance (the “D/FA”), to approve extensions of the original 6 month period after approval of the loan in which the loan must be funded by the sale of a debenture. Any additional extensions would have to have to be granted by the D/FA. While this delegation will reduce the time it takes to receive such approval, the short time period in which lenders have to complete all due diligence, closing, and funding of the loan still remains a significant challenge.

The SBA is hopeful that the changes to the 504 Temporary Debt Refinancing Program will increase program utilization prior to the expiration of the remaining program funds on September 30, 2011.

For more information on the 504 Temporary Debt Refinancing Program requirements contact Janet at 215-542-7070, or jdery@starfieldsmith.com.