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Hi, I’m Chris Hurn, the CEO and co-founder of Mercantile Capital Corporation. We are
one of the nation’s leading experts in SBA 504 loans and that is why you are watching
this video. We are going to talk to you today about the new refinance provisions utilized
in a 504 loan. There is a tremendous amount of detail out there right now. I am going
to try and go through a lot of it today, what we know in Phase 1 of the SBA’s roll-out.
The regulations were just released yesterday afternoon so people are still sort of dissecting
it. There are some important details you need to know particularly as it relates to us potentially
doing Interim second mortgages for you which is why we have been sending you some of these
emails. As you know, our website www.SBA504InterimLender.com is what we have encouraged you to go to in
the past. We will have other websites regarding the SBA 504 provisions and we will certainly
let you know about those. Let’s jump into this right away. I especially want to address
the issues surrounding same institution debt and what the eligibility and requirements
will be to refinance some of the debt that may be on your balance sheet at your bank
right now.
The first thing to note is that this will only apply to notes that have a maturity on
or before December 31, 2012. So if the maturity is later than that, those may be addressed
in future roll-outs from the SBA but they wont be involved in this first phase. The
second thing is that the debt has to be outstanding for at least two years; that is pretty important.
Number three, the subject business has to be in operation for at least two years as
well so this will not be for start-ups, for instance. Number four, the borrower has to
be current. The SBA is defining “currency” as no payment deferrals or past dues of more
than 30 days and that has to be for the past 12 months. This is the SBA’s attempt to
prevent dumping of assets into this program whereby it has a government guarantee and
it could potentially harm the US tax payers. This isn’t going to be for the worst of
the worst. This can be for other borrowers but certainly not those. Number five, was
the debt to be refinanced substantially (85% or more as defined by the SBA) used for eligible
504 purposes? Traditionally, what is meant is owner occupied commercial real estate,
heavy machinery and equipment and closing costs related to the project. Again, there
are provisions in the bill that were passed under the Small Business Jobs and Credit Act
of late September 2010 that are going to address what we have “classified” as cash-out
refis which is not something you would normally do with an SBA 504. Although, with certain
documentation, a lot of business owners, as you know, will take on personal obligations
(credit card debt, second mortgages, etc.) to put cash back in the business to keep their
business stay afloat. We saw a lot of people do that over the last couple of years. Those
may be eligible for future refinances under Phase 2 of the SBA’s roll-out of 504 refis
but it certainly isn’t right now.
Let’s talk about a couple other things. Applications cannot be submitted prior to
February 28th. Today, being the 17th of February, we have eleven days to try and look at your
portfolios. If you have new borrowers coming in the door that this might be applicable
for, take a look at it and let’s get going because we only have eleven days before the
SBA will start accepting these applications and I know there is going to be a big rush
to do this. By the way, there are $15 billion that has been allocated under this program
over the next two years so that is another thing that is important. I suspect a lot of
that is going to be used up so the earlier you get it in, the better. There is no cash-out
provision, as we talked about. The maximum loan-to-value is 90%. Any additional collateral
can be pledged to supplement a short fall on the project collateral. The program is
for debt refinancing only. There is going to be no expansion or purchase of real estate
or other fixed assets as part of THESE submissions. That doesn’t mean you can’t do an SBA
504 on other projects but it not on this particular one. The amount of total financing cannot
exceed 90% of the total fair market value of the fixed assets that are pledged under
this program. That means we have to have appraisals that are under six months. If we are going
to be pledging someone’s house as additional collateral or equipment or machinery you are
going to have to get appraisals on that stuff and they have to be within six months. The
borrower’s contribution may be satisfied by its equity in the collateral being offered
to the SBA; a minimum of 10% but could be a lot more. There cannot be any refinancing
of existing SBA projects. This is important and I have already hear this from many other
bankers- they have asked me, “Chris, can we take out some of our other existing SBA
504 loans, our 7 (a) loans, BNI loans, or USDA loans”? “No you can’t.” Anyone
with a government guarantee is not eligible to be refinanced under this new SBA 504 refinance
provision. There is also no refinancing where the creditor of the debt is in a position
to sustain a loss.
If your bank wants to quickly shrink its balance sheet because of some regulatory pressure
that you may or may not be in or is just trying to meet new capital ratio requirements, one
way is to take some of the loans that are in your portfolio and consider doing an SBA
504 refinance, encouraging the borrower to take a look at this and in those situations
we would be more than happy to help you provide that Interim second mortgage until the debenture
takes us out. I have no problem doing that. You could very quickly go from a loan that
you made that was originally about 75%-90% loan to value, (perhaps your even in an underwater
position in terms of equity now) and you could quickly go to 50% of the fair market value
of the assets that you pledged under this program. It is something that can benefit
a lot of banks out there and I encourage you take a look at that. I don’t expect everyone
to become an expert of 504 loans overnight; that is certainly not the situation. I would
like you, especially if you are a community bank, as your outsource SBA 504 experts. That
is what a lot of banks already consider us for. Some of the earlier videos I have sent
you talked about how we have already worked with three dozen banks around the country
providing Interim second mortgages for SBA 504 loans and we can certainly do the same
thing under this refinance provision. We will walk you through the process and really help
out your bank and your borrowers. I encourage you to do that and give us a call
or email us please. Our email is info@mercantilecc.com, you can give us a call at 1-866-622-4505 or
you can visit our website www.504Experts.com or even www.SBA504InterimLender.com. We will
have a future website that will address just 504 refinances as well. Thank you for watching
this video. I hope it has been helpful. We’ll have new stuff up soon and you will be able
to go through the checklist as well. I encourage you to take a look at your current portfolio
and see if we can help out a borrower or help you out. Thanks so much.