After being defeated, Vince Lombardi, the legendary football coach said that his Green Bay Packers didn’t lose the game, “we just ran out of time.” Similarly, business owners are worried they will run out of time to refinance their balloon mortgages coming due. So if you own your office building, warehouse, restaurant, small hotel or franchise, you need to know about the September 27, 2012 deadline for the U.S. Small Business Administration’s temporary “rescue” program called “504.”
How did real estate owners get into this mess? More importantly, what is this temporary SBA program and how can you find a lender who is willing to refinance your property at today’s low interest rates?
We got into this mess during the real estate boom when lenders were overly optimistic about increasing values and the growing economy. Before the Great Recession, lenders were willing to highly leverage real estate and would refinance loans. So not suprisingly, commercial real estate borrowers opted for three and five-year balloon mortgages because the shorter term got them lower interest rates. Accordingly, instead of choosing 10-year or 20-year terms, borrowers chose the lower interest rates and hiked their loan amounts.
But in hindsight they made the wrong decision because the short-term loans are now coming due and refinancing options are very limited. While 80-percent to 90-percent loan-to-value mortgages were available before the credit crunch, 60-percent to 75-percent is more probable today. Additionally, larger cash flow ratios, stronger balance sheets and higher personal credit-scores are needed.
Even if borrowers can meet the new underwriting standards, property values have nosedived, restricting loan amounts further. Hotel values, for example, have plunged 40 percent, according to Bob Coleman, founder of Coleman Publishing and a former business lender.
But he also notes, “With the increase in 504 loans to $5.5 million, today’s SBA lender can easily finance a $10 million plus project.” Coleman is referring to SBA’s basic 504 program that targets commercial real estate and other fixed assets.
The program consists of two loans, a bank’s conventional first mortgage and SBA’s subordinated debenture, which is similar to a second mortgage. The combination of the two provides up to 90-percent, fixed-rate, long-term financing. The government-guaranteed debenture is limited to $5.5 million or 40-percent of the project cost. The first mortgage is usually 50-percent and can go higher if the bank is willing to take more risk.
The basic program is not suitable for refinancing of existing debt. But under a new SBA initiative lenders are permitted to use 504 loans to refinance balloon mortgages coming due. A recent enhancement permits the borrower to include 12-months of projected working capital into the new loan.
You can find lenders who understand SBA’s 504 refinancing program online at http://www.boefly.com. The online marketplace matches borrowers with over 2,000 funding sources for franchise borrowers, small-business owners, commercial real estate developers and investors, and borrowers in most other categories of commercial financing. Qualified applicants get to choose among multiple offers by lenders.
Tallahassee, Fla.-based Florida First Capital Finance Corporation says that it closed the first 504 refinancing in Florida. It paid off two ballooning loans for Lazy Days Restaurant in Islamorada, Fla.
FFCFC is a SBA-licensed certified development company. CDCs arrange 504 loans by processing the debentures and coordinating the piggyback loans with SBA, first mortgage lenders and the borrowers. Your BoeFly lender can tell you which CDCs are the most active in your location.
Carlos Calero, FFCFC’s vice president said that the Lazy Days funding was 90 percent of value. “We need to work backwards because we need to establish the appraised value of the property,” he e-mailed me. “Once we establish the appraised value with an appraisal, the bank will finance the 50 percent,” he says. Then the SBA debenture will fund the difference so that the total financing is “a max of 90-percent of the appraised value.”
According to Calero, FFCFC requires the business’s cash flow to be 20-percent greater than the loan payments, or a debt service coverage ratio of 1.20, in financial parlance. He adds that banks “are from 1.25 to 1.45,” but “most of the lenders will work with projections; this will be case by case.”
Chris Hurn, chief executive of Mercantile Capital Corporation, is a 504 lender. He says that it took 13 months for the 504 refinancing program to get up to speed because it needed the enhancements that SBA untimately put in place. That is why, he says, it is due to expire in six months and many borrowers did not have a chance to refinance their properties. But Hurn and other 504 lenders are contacting their legislators to grant an extension.
Given the divisiveness in Washington, granting the extension may not come to fruition. So as the late Coach Lombardi would have warned us, now it the time to act before the clock runs out.
Jerry Chautin is a former entrepreneur, commercial mortgage banker and business lender. He writes and blogs about business and real estate for several publications and is SBA’s 2006 national “Journalist of the Year.” Jerry is a volunteer business mentor with SCORE, “Mentors to America’s Small Business,” offering free business advice. Post your comments and ask questions on this Blog or send Jerry an e-mail.
Copyright © 2012 Jerry Chautin — All rights reserved.