October 17, 2011
The following revisions were released as part of the Jobs Act temporary refinance program as follows:
- Change 1: The first trust deed loan by the lender which
have been a minimum of 50% of the lower of the appraised value or the
cost need no longer be at 50% and can be any combination of the
appraised value. For example, a first trust deed can be at 35%, the CDC
SBA portion at 34%, and the borrower equity at 31%. The total loan to
value need to be limited to 90% which means that the first trust deed
and the CDC SBA portion need to add up to a maximum of 90% of the value
where the equity would be at the minimum of 10%.
- Change 2:
- Equity in fixed assets can now be used to fund other
eligible expenses including expenses prior to the loan application date
or projected up to 18 months such as working capital, pay down of line
of credit, inventory, salaries, utilities, or renovation and PIP costs,
etc.
- Other acceptable collateral can be combined with the
project collateral to provide the 90% Loan to Value. A minimum of 10%
equity needs to remain in the project.
- Change 3: Multiple prior refinancing, multiple current
notes to be consolidated into one loan, and also seller refinancing are
eligible now if 85% of the total debt is SBA eligible.
- Owner debt IS NOT ELIGIBLE for refinance
- Buy out of partners IS NOT ELIGIBLE for refinance
- If a lender is refinancing its existing loan, then a modification rather than refinance can be used instead
- Change 4: Although it has been required that the loan could
not have been more than 30 days past due according to the original
note, the modification and deferments are now allowed by the program
- Change 5: There cannot be a loan on a free and clear property for the sake of pulling equity out.
- Change 6: Authorizations need to be approved before September 27, 2012
There are other technical details in the change, however, the main concerning changes are the items one through six above.
March
29, 2011
In an expected move by the SBA, the date restriction on the 504
refinance program is being lifted and the loans that are being
refinanced through this program do not have to mature by December of
2012. The 504 refinance program is a short term measure to increase
credit availability for the small businesses and will expire on
September 27, 2012 offering 15 billion of dollars available to the
market in 2011 and 2012. Combined with the first mortgage offered by
the lenders, the program allows 33.8 billion of financing to be
available to the credit market in the two fiscal years.
The major criteria for the refinance through this program are:
- Loans of up to 15,000,000 can be refinanced
- The loan to be refinanced cannot be an existing guaranteed
loan (existing 504, SBA 7a, USDA, etc.)
- Borrowers can refinance up to 90% of the current Fair
Market Value (FMV) of the property. SBA will require an appraisal to
determine the FMV. All the qualified costs for this refinance may be
included in the loan as long as the Loan to Value remains at 90% of the
FMV.
- The loan to be refinanced must be current within the past
12 months
- The debt must have incurred over 2 yeas ago
- The business must have been in operation for 2 years prior
to the submission of the application for the 504 refinance
- The refinance structure must not exceed the following
limits: No less than 50% by the lender, no more than 40% by the SBA,
and no less than 10% equity by the borrower. The 10% may come from
equity in the hotel and the FF&E, cash, or other fixed
assets. Note: Hotels (special/single use
property) are not required to have have equity of higher than 10% (As
SBA requires 15% equity for the acquisition of hotels or other
single/special use properties)
As in any other financing project in this credit market, the Fair
Market Value determined by an appraisal plays a key role. In many
instances, the hotels are under collateralized in which case
refinancing may be challenging. The following example depicts this
scenario and possible remedies offered by the 504 refinance program:
Structure of an Hotel SBA 504
Refinance
|
Fair
Market Value of the hotel as indicated by an appraisal
|
$5,000,000
|
Existing
Debt to be refinanced
|
$5,500,000
|
First
Lender maximum loan at 50% Loan to Fair Market Value
|
$2,500,000
|
SBA
2nd position debenture loan at maximum 40% Loan to Fair Market Value
|
$2,000,000
|
Total
Loan through SBA refinance
|
$4,500,000
|
Shortage
|
$500,000
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This shortage amount can be remedied as follows:
- Cross Collateralization where the borrower may pledge other
fixed assets (such as other hotels, other commercial or residential
properties, etc.) to increase the collateral value and to maximize the
loan to $5,000,000
- The existing lender may forgive the shortage and write it
off
- The existing lender may issue a subdebt which maybe placed
on a 3-year payment standby
Some of the rules for this program are pending and will be determined
within the next couple of months. At the moment the program is under
comment period until May 18th of 2011 where stake holders including
small business owners and borrowers will post their comments about the
program online. New modifications to the program is expected after
these comments are reviewed. You may post your comments for this
program by going to www.regulations.gov
and search for 3245AG17 or click on SBA 504 Comment page.
Although lenders offering the 50% loan on hotels are scarce, we are
seeing new non-FDIC lenders coming to the market who will specially be
instrumental to us in the hospitality industry. These lenders are not
portfolio lenders but will be selling the first loans in the secondary
market as these first trust deeds are guaranteed through the ARRA
Stimulus program.
The current rates on the first trust deeds depend on the capital market
that offers the funds but is ranging from low 6% to low 7% for the
banks, high 6% to high 7% for non-bank lenders, and mid 7% to mid 8%
for private lenders. As of this month, the effective rate on the 2nd
trust deed offered by the SBA is 5.94% full term amortized and fixed
for 20 years. It is worth noticing that as opposed to the 2nd trust
deed that is a fully amortized loan, first trust deed loans generally
mature in 10 years and are either variable or fixed for the first five
years (more on 504 program)
For further information please contact Ramin Mostaan at ramin@scicap.com or (949) 477-5000.
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