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May 11, 2011

Firm News for May 2011: Key Changes To The SBA 504 Temporary Debt Refinancing Program Aimed To Attract More Loans

By: Janet M. Dery, Esq.

Since the SBA 504 Temporary Debt Refinancing Program (the “Program”) was enacted on September 27, 2010, there have been revisions to its eligibility and closing requirements. These revisions have been made to attract lenders and businesses to consider this type of funding when a business is looking to refinance real estate or other fixed asset financing that was based on values that have declined due to the financial crisis. To assist lenders in understanding the revisions to the program, the following is a summary of the key changes made.

Perhaps the most significant change made to the Program was the removal of the maturity date requirement. Prior to the notice, the maturity date of the note had to be no later than December 31, 2012 for a loan to be eligible for refinance under the Program. Unfortunately, that date limitation, along with the other eligibility requirements, severely restricted the number of loans that were eligible to be refinanced under the Program. While the SBA’s rationale for the limitation (which was the desire to address those businesses that were most in need of assistance and facing potential foreclosure) was sound, the demand for the refinance of these loans was proved to be significantly lower than expected. The removal of the maturity date requirement opens the Program up to refinance any loan that meets the other eligibility requirements, whether the loan has a definitive maturity date or is just “on demand.” This provides a much wider pool from which to find loans that meet the other eligibility requirements.

Another significant change is the allowance of the modification or assignment of the loan documents for the existing debt instead of requiring all new executed loan documents to represent the new debt under the Program. If the loan to be refinanced under the Program is considered “Same Institution Debt,” as defined in 13 CFR section 120.882(g)(15), then the permanent loan lender, also known as the “Third Party Lender,” may modify its original loan documents to reflect the new loan amount. If the loan being refinanced is from another institution, then the SBA may permit that institution to assign its documents to the bridge loan lender, also known as the “Interim Lender,” which can then be modified and/or further assigned to the Third Party Lender. The attraction of this revision is the potential for lower closing costs to Borrower. Through the modification or assignment of the original documents instead of new documentation, the Third Party Lender and/or Interim Lender can: (1) potentially reduce title costs, as only an update/modification to the existing policy rather than an entire new title policy may be required; and (2) lower filing fees as only minimal documentation will be filed to represent the refinance (such as an assignment of the existing lien document or a modification to the existing lien document) rather than filing of an entirely new lien document and the termination of the existing lien document. Also, if the real estate or fixed asset is located in a state that charges recordation taxes, the assignment of the lien documents may allow the Borrower to avoid paying duplicative recording taxes previously paid on the original debt.

Lastly, when the loan to be provided under the Program is insufficient to refinance the entire outstanding debt, the holder of the existing debt is allowed to accept a new subordinate note from the borrower for the deficiency (the “Deficiency Note”). Originally, such Deficiency Note had to contain at the minimum a three year stand-by requirement. With the publishing of SBA Policy Notice 5000-1204, there is no longer an absolute requirement regarding the stand-by. Each time a Deficiency Note is considered, the CDC can make alternative recommendations to the SBA based on the borrower’s cash flow and the credit risk involved. Then the SBA will determine on a case-by-case basis whether there should be any stand-by period and, if so, how long the stand-by period should be. The possibility that a Deficiency Note will not be put on stand-by at all can encourage the existing loan holder to cooperate in working with Borrower to have its debt refinanced under the Program.

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