WASHINGTON — The Small Business Administration on Wednesday said it is permanently expanding a lending program that may take pressure off the struggling commercial real estate market.

The expansion of the agency's 504 lending program, which targets small businesses that put up fixed assets such as real estate and equipment as collateral, is intended to let borrowers roll existing debt into new loans. Borrowers will be eligible to roll over up to 50% of the total cost of a project like buying equipment or renovating a building.

"For many small businesses they have gone back to the banks and found that the banks are unable to provide more credit," SBA Administrator Karen Mills said during a conference call announcing the program. "In this case they will be able to refinance that loan into a 504 SBA-backed guaranteed program."

The 504 expansion, mandated by the massive economic stimulus package Congress enacted in February, offers a low-cost loan and a reduction of existing debt to help small-business owners expand their businesses by buying real estate or adding to their existing buildings.

To qualify for 504 refinancing and new loan, a business owner must have kept his or her debt payments current for at least a year. The borrower must be expanding, and any new project must be related to its existing business.

The SBA's 504 lending program differs from its flagship 7(a) loan program in that banks put up half the capital for a 504 loan. The rest comes from nonprofit organizations called commercial development companies, along with an equity injection from the small business itself.

The number of 504 loans made in this fiscal year to date is down 41% from the year earlier. The SBA has approved about 3,900 loans, worth about $2.28 billion. At this time last year it had approved about 6,700 loans, worth almost $4 billion.

But Mills said the volume of SBA loans has grown quickly since the stimulus bill became law. In the six weeks after implementation of the stimulus, compared with the six weeks before, 504 lending rose 31%, she said.

Christopher Crawford, the head of the National Association of Development Companies, said during the conference call that the program could help commercial real estate borrowers roll over their debt obligations.

"These loans are coming due, probably in droves, and they are continuing to come due at the worst possible time," he said.

Many banks, Crawford said, are unwilling to let commercial real estate borrowers refinance their loans because property values have declined and regulators have intensified pressure on banks to reduce risk. A new 504 loan, Crawford said, could be the solution.

"This can happen when there's just no other capital available right now," he said.

But Joe Aire, the president, chairman and chief executive of the Orlando-based lender Integrity First Financial Commercial Real Estate Lenders LLC, said the program does not go far enough because only borrowers who are expanding are eligible.

Vincent Muratore, a regional director and vice president at Zions Bank National Real Estate, said the program has potential.

"For lenders it's a great opportunity to increase their business in this market," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.