June 24, 2009
One of the provisions included in the Recovery Act provided new permanent
authority for refinancing community development loans under the 504
program. Here are the highlights of the program:
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The refinance authorization
by the Recovery Act applies to applications received after June 23, 2009
the effective date of the regulation or to applications prior to this
date provided that the SBA debenture portion has not been funded
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The refinance is qualified only in cases of expansion of an
existing business. This may include the acquisition, construction or
improvement of land, building, or equipment of a hotel in the existing
or a new location. This means you can refinance a hotel for the
construction (expansion of business) of a new hotel
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The debt being refinanced cannot exceed 50% of the expansion loan
requested
Example:
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a |
Current Debt on the hotel |
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3,000,000 |
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b |
Expansion cost |
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1,800,000 |
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c |
Qualified portion of the current debt |
b*50% |
900,000 |
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d |
Unqualified portion of the current debt for refinance |
a-c |
2,100,000 |
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e |
Total consideration for SBA |
b+c |
2,700,000 |
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f |
SBA structure first TD (generally at 50% of the total cost) |
e*50% |
1,350,000 |
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g |
SBA structure 2nd TD (generally at 35% of the total cost) |
e*35% |
945,000 |
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h |
Injection needed for this project (unless the property has equity) |
e*15% |
405,000 |
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i |
Total first TD - unqualified current debt and the SBA first TD |
d+f |
3,450,000 |
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The overall structure
of the loan would be:
First Trust Deed
loan: 3.45MM
Second TD SBA loan:
945,000
Injection by the
owner (property equity could be applied instead): 405,000
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The existing debt should have been used to acquire the land or the
building, the construction, or the equipment and collateralized by fixed
assets qualified for a 504 loan
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The existing debt was incurred for the benefit of the small business for
which the new expansion costs are incurred. Existing 7(a) and 504
loans may be refinanced under this section
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The financing will provide a substantial benefit (10% reduction in
payment) to the borrower when prepayment penalties, financing fees, and
other financing costs are accounted and added to the amount being
refinanced
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The borrower has been current on all payments due on the existing debt
for not less than 1 year preceding the date of refinancing
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The financing under section 504 will provide better terms than the
existing debt including longer maturity, lower interest rate, improved
collateral conditions, or less restrictive loan covenants
For more information you may review the
Federal Register: June 23, 2009 (Volume 74, Number
119
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