Small-business lenders were aflutter in September when the Small Business Jobs and Credit Act was passed. A particular provision will enable Small Business Administration 504 loans (for owner-occupied real estate) to be used for refinancing — for the first time ever. Many lenders have been advocating for this change to the 504 program for years, and some even viewed it as the Holy Grail of SBA lending. They believe that opening up 504 loan program dollars to refinance existing commercial real estate will be a windfall for small businesses, economic development and job creation. With 20-year fixed rates for the SBA portion of the loan near 6%, the refinance option is a lending explosion just waiting for a spark.
The 504 program is a commercial real estate lending program with a job creation requirement — new and retained jobs are officially tracked. So, not only does it provide capital to small businesses, but it also stimulates the overall economy. And, most impressively, it is a zero subsidy program — offering all of these benefits at virtually no cost to the government.
Thousands of small-business loan officers — both from conventional lenders and certified development companies that handle the SBA portion of the loan — have been anxiously awaiting for refinancing rules and regulations to come down from Washington so they can start lending. Sadly, it has been nearly five months, and we are no closer to refinancing a commercial property with a 504 than we were last fall. Without guidance from the SBA, all we can do is wait.
Despite this, the buzz is considerable. News stories about the value of the program have been abundant and blog posts, YouTube videos and Facebook entries are easily found online. Some companies have starting taking pre-applications — all of this with little feedback from the government. The somewhat inexplicable delay adds to the overall negative perception the SBA has often had, while compounding the belief that small-business help from the government is just lip service. Most important, it denies capital to thousands of small-business owners who could use it to help revive our overall economy.
The good news is that the SBA is working on the regulations; at least that's what we have been told. I attended a public meeting recently where agency officials asked for feedback from the lending community. In addition, I have heard from other sources within the SBA that a few sticking points must be resolved before regulations will be released, hopefully sometime in the next few months. Here's a synopsis of three key points.
- A different tier structure may be in the offing. With a typical SBA 504 loan transaction, a conventional lender finances 50%, the SBA essentially finances 40% (through an interim loan until the government guaranteed loan is issued) and the owner contributes a 10% equity stake. For the new wave of refinancing, the SBA is debating whether to ask for a different tier structure if a lender is refinancing a loan off of its own books. Regulators would want the conventional lender to increase its share from 50% to an undetermined number. Such a change would spread more risk to the lender (though less than what they currently hold) and also, theoretically, preserve more 504 dollars for other deals.
- The SBA wants to restrict the use of proceeds. If a small-business owner refinances his property with a 504 loan, the SBA has said it wants the proceeds only to pay for regular 504 proceeds and for business expenses. On its face, this seems reasonable, but it may be too restrictive for some business owners. Certainly, some small-business owners want to refinance as a means to get cash out of their business, but many are looking for capital so that they can reinvest it in their companies. Refinancing also will help small-business owners who have taken on debt for their businesses during the downturn. As a model, SBA should look for guidance to how loan proceeds are treated with SBA 7(a) loans.
- The SBA wants additional collateral for commercial properties that are underwater. This is another topic of debate that could be easily resolved. Within the act, it says that a small-business owner can refinance up to 125% of the current value as long as they pledge additional collateral. The SBA has not determined how that collateral should be pledged, though again, the guidance for 7(a) loans is a clear precedent that makes sense and is well known and understood by small-business lenders.
How the SBA decides to handle these points will certainly impact how 504 loans provide refinancings, but they don't appear so complicated as to merit such a long delay in implementation. The government has shown that it can react quickly in times of financial crisis.
Initiatives like the Troubled Asset Relief Program were implemented in a matter of months. Executives from American International Group had their bonuses thwarted by Congress in a few frenzied days.
Today, however, nearly five months after the Small Business Jobs and Credit Act was signed into law by President Obama, we still cannot refinance a commercial property with a 504 loan, and small-business owners continue to suffer.
