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Hi, I’m Chris Hurn, the CEO and co-founder of Mercantile Capital Corporation, one of
the nation’s leading 504 (what we call the “Smart Choice Commercial Loan”) lenders.
If you are a mortgage broker or real estate broker watching this, I want to go through
what I think is pretty ground breaking in our industry which is the new provision, the
regulations just came out yesterday afternoon to allow SBA 504 loans to refinance existing
debt. This is something that has never been done before. You could always use an SBA 7(a)
loan to refinance commercial debt but not a 504. The reason this is so important is
because an SBA 504 loan, which you may or may not realize, has about half of its loan
government guaranteed at the least expensive financing available for small business owners.
Rates are at roughly 6%, fixed for 20 years. Typically, people only have to put 10% down
which is usually ½ to ? which you would otherwise have to put down with conventional bank financing;
that is what is exciting. There are a lot of specifics to it, a lot of rules, and I
am going to go through it all so you have accurate information. I do not expect you
to memorize all of this. We are going to have a website out shortly that is going to detail
all of this information and give you a checklist that you can go over. If you have past borrowers
that would fit for this, which is where it would apply for commercial real estate brokers
or mortgage brokers and current clients would fit for this as well. This is going to be
really big and I want to make sure that you play it and are a part of it.
The most important thing to know is the debt that is going to be refinanced has to have
a maturity before December 31, 2012. In other words, between now and December 31, 2010 the
notes have to become due. That is important because this is Phase 1 of the SBA rolling
out this program. I expect there to be additional phases and you won’t have this restriction
but right now that is Phase 1 and it is very important to understand. Number two, has the
debt been outstanding for more than two years? That is also important. If you just did a
deal for them a year ago it is not going to be eligible and everybody is going to be going
off these checklists to make sure if it is eligible or ineligible. Number three, has
the subject business been in operation for at least two years? If you have historically
done start-up financing with the SBA, and it does do that particularly with the 7 (a)
program, it is not going to be something that we can do here with SBA 504 refis. Number
four, “Has the borrower been current?” By “current” I mean no payment deferrals
or past dues of more than 30 days on notes to be refinanced over the past 12 months.
This is not going to be the guy who is barely hanging on and who just can’t get by. Unfortunately,
this is not going to be a program that can help. The SBA did not want to take on that
credit risk and I understand, as US tax payers we don’t want that to happen either. Number
five, the debt to be refinanced has to be substantially (85% or more as defined by the
SBA) used for eligible SBA 504 proceeds. Historically that means owner occupied commercial real
estate, heavy machinery and equipment, and closing costs related to that. In the future
I expect, in Phase 2 or maybe beyond, the SBA will come out with regulations that will
allow us to do, effectively, some cash-out refinancing provisions. In other words, if
a small business owner took on some debt personally on their credit cards or maybe took a second
mortgage out on their home and used the proceeds and can document those proceeds that went
into the business, that may be eligible debt to refinance in the future. But right now,
under Phase 1, that is not the case.
Those are five important things to keep in mind when you are considering submitting a
transaction to us. But, let me go into some more detail as it will be helpful. The SBA
is not going to be accepting any submissions under this program until February 28th. Today
is the 17th which is eleven days from now. The bottom line is that I would use these
next eleven days to start accumulating all the documentation that is going to be required.
If you go to our website, www.504Experts.com, you will see a basic application right there
and a checklist that you can go by. Most of that is what we are going to require. There
may be a couple other things relating to this program but we can certainly let you know
later. In the mean time it is best to accumulate the documentation now so that we can try to
get your loan in for that first queue on February 28th. There is no cash-out refinance provision;
we already talked about that. The maximum loan-to-value is 90%. Additional collateral
can be pledged. We are going to have to get updated appraisals on it that are less than
six months, just so you know. The program is for debt refinancing only. Do not include
purchasing new equipment, purchasing more property, expansion, or anything like that
in THIS particular transaction. That doesn’t mean you can’t do a separate SBA 504 loan
for that but for this one right now we can only deal with what already exists. The amount
of total financing cannot exceed 90% of the fair market value of the collateral that is
pledged; that is important to know. The borrower’s contribution may be satisfied by its equity
in the collateral it has offered to the SBA. It has to be a minimum of 10%, can be more,
but that is how we are going to back into the calculations. There is no refinancing
of existing government guaranteed debt. That means 7(a), 504, USDA, it doesn’t matter-
none of that is going to be eligible. This is actually, and ironically, refinancing conventional
debt that perhaps should have been done originally by an SBA 504. Nevertheless, this is important.
Again, no government guaranteed debt is eligible for refinancing. Last, there is no refinancing
where the creditor on the debt is in a position to sustain a loss.
All of these are the stipulations under the new SBA 504 rules. I hope you enjoyed watching
the video. I hope you watch it again. Memorize these points if you can. Certainly come back
and check out our new website which we will have here down the road. Go to www.504Experts.com.
Come back to this YouTube channel. Stay tuned. We are going to have more information about
what is happening with these programs. I think it is a tremendous business opportunity to
get going on this right now if you are a mortgage or real estate broker and to actually make
2011 one of your best years ever! I look forward to working with you and thank you again for
watching.