504 Refinance UPDATE October 12, 2011

 The Federal Register contained the language for the final rule for the SBA 504 Temporary Refinance Program. (Federal Register, 12 October 2011; Vol. 76 No. 197 pages 63151-63156)

These are major and very positive changes.

The critical changes were in three areas:

1.  Specifics for the eligibility of working capital expenses through the temporary program

2.  Elimination of the requirement that the Third Party Loan equal fifty percent (50%) of the current fair market value per a current appraisal

3.  Modifications for the determination of eligibility for qualified debt to be refinanced regarding loan genealogy and currency of payment status specific to loan modifications

Working capital expenses already incurred or coming due within eighteen (18) months may now be included in 504 temporary refinance projects, subject to Borrower and CDC certification of the costs with further substantiation at the request of SBA.

The maximum loan will still be limited to 90% of the fair market value, as determined by a current appraisal acceptable to SBA. By providing long term and low fixed rate financing for a finite component of working capital needs SBA will provide a significant working capital support for small businesses.

The Third Party Loan must be equal to the 504 loan, meaning we assume the net debenture, and still operating under the 90% of the fair market value limitation as above. This removes the former requirement that the Third Party Loan equal fifty percent (50%) of the currently appraised fair market value. This removes a significant disincentive to use of the program by allowing lenders and borrowers to more fully utilize the long term low fixed rate financing offered by the 504.

Finally, the definition of "Qualified Debt" was simplified and broadened:

The simplification deals with the level of documentation required to demonstrate that a loan was used "substantially all ...was for the acquisition of Eligible Fixed Assets". In short, if the original underlying loan met this standard and the loan to be refinanced is cast as a commercial loan, the loan will be deemed eligible. Borrower and Third Party Lender certification of the above is required and SBA retains the right to request further documentation.

The broadening deals with the issue of loan modifications and allows loans current under pre-existing written modifications to be considered eligible for refinance. The first change removes a significant documentary hurdle to using the program and the second recognizes that a Borrower and Lender should not be penalized for pro-active approaches to working through the recent economic turmoil.

American Enterprise Funding Group -

5870 Harmony Grove Road - Dover, PA  17315