SBA Launches Temporary Program to Provide Commercial Real Estate Refinancing Relief

by:  Michael L. Rich

Small businesses facing financial difficulties with their commercial mortgages may be eligible for a new federal program that will allow business owners to refinance.  Specifically, small businesses facing maturity of commercial mortgages or balloon payments before December 31, 2012 may be able to refinance their mortgage debt with a 504 loan from the U.S. Small Business Administration (SBA) under a new, temporary program announced on February 17, 2011.


SBA’s traditional 504 loan program is a long-term financing tool, designed to encourage economic development within a community.  A 504 loan provides small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.  Typically, a 504 project includes three elements:  a loan secured with a senior mortgage or lien from a private-sector lender covering up to 50 percent of the project cost; a second mortgage secured by a junior lien from an SBA Certified Development Company, backed by a 100 percent SBA-guaranteed debenture, covering up to 40 percent of the cost; and a contribution of at least 10 percent equity from the small business borrower.

The new refinancing loan program will be structured like the SBA’s traditional 504 loan, with borrowers committing at least 10 percent equity and working with third-party lending institutions and SBA-sponsored Certified Development Companies in the standard 50 percent/40 percent split.   Notably, the new program will not require an expansion of the business in order to qualify.

The new program was authorized under the Small Business Jobs Act.  The SBA will begin accepting refinancing applications on February 28, 2011, and will be accepting applications through September 27, 2012.  The SBA initially will open the program to businesses with immediate need due to impending balloon payments before December 31, 2012.  SBA will revisit the program later and may open it to businesses with balloon payments due after that date or those that can demonstrate strong need in other ways.

Upon launching, SBA Administrator Karen Mills  noted:  “The economic downturn of recent years and the declining value of real estate have had a significant, negative impact on many small businesses with mortgages maturing within the next few years.  As a result, even small businesses that are performing well and make their payments on time could face foreclosure because of the difficulties they face in refinancing and restructuring their mortgage debt.  This temporary program is another tool SBA can provide to help these small businesses remain viable and protect jobs.”

Under this temporary program, qualifying borrowers will be able refinance up to 90 percent of the current appraised value or 100 percent of the outstanding mortgage, whichever is lower, plus eligible refinancing costs.  Loan proceeds may not be used for other business expenses.  Existing 504 projects and government-guaranteed loans are not eligible to be refinanced under this temporary program.

Congress authorized SBA to approve up to $15 billion in loans under this program – $7.5 billion in both fiscal years 2011 and 2012.  Approximately 20,000 businesses are anticipated to benefit from this new temporary program.  More than 1,000 business owners in New Jersey could qualify for the program.  Applications can be processed through one of the SBA’s local affiliates.

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