Changes with the SBA 504 Refinance Program

Oct 12, 2023 | Industry Insights

Exciting New Changes with the SBA 504 Refinance Program!

 

 

 

 

 

 

 As a reminder:

  •  Equipment only, Real Estate only, or Mixed Use projects all are eligible for the SBA 504 Refinance Program.
  •  Borrowers could qualify for cash out for working capital with the SBA 504 Refinance Program. 
  •  Great candidates for the program include:
    •  Conventional loans
    • Contracts for deeds
    • Capital leases
    • Existing government guaranteed debt

 

Today, SBA published in the Federal Register a Final Rule on the SBA 504 Refinance Program that included the following changes. The effective date of the Final Rule and changes is November 13, 2023.

Changes include – 

  1. The program is able to refinance “Qualified Debt.”  The regulatory definition of the Qualified Debt in which SBA requires is that “substantially all” of the original use of proceeds of the Qualified Debt were for an Eligible Fixed Asset, such as land, buildings, machinery, and equipment. The definition of “substantially all” has changed from 85% to 75% of the original use of proceeds of the Qualified Debt was for fixed assets. It’s now going to be eligible for refinance if 25% of the original use of proceeds were for ineligible SBA 504 purposes.

 

  1. When refinancing a SBA 7a Loan, SBA removed the requirement for written verification that the present 7(a) lender is unwilling or unable to modify existing 7(a) debt. With the Final Rule, SBA is now requiring the CDC to provide advance notice to the existing 7(a) lender in writing (by email or letter) that the new 504 project will refinance the existing 7(a) loan.

 

  1. Added a new requirement that if the 504 project is refinancing an existing 504 loan of another CDC, the CDC must provide advance notice to the existing CDC in writing (by email or letter) that the new 504 project will refinance that CDC’s existing 504 loan.

 

  1. Clarified that in calculating “substantial benefit” of at least 10% payment savings on the debt being refinanced, any subsidy recoupment fees [applicable when refinancing an existing 7(a) loan] payable to SBA by the Borrower must be added to the amount being refinanced along with prepayment penalties, financing fees, and other financing costs. A Subsidy Recoupment Fee applies to certain 7(a) loans with a maturity of 15 years or more, when the Borrower voluntarily prepays more than 25% of its loan in any 1 year during the first 3 years after first disbursement.  The fee applies to the full amount of the prepayment, not just the guaranteed portion of the prepayment. The fee is 5% of the prepayment amount during the first year, 3% the second year, and 1% in the third year. Please refer to SOP 50-10-7, page 49, paragraph C.3. and 13 CFR 120.223 for more details on SBA 7(a) subsidy recoupment fees.

 

In today’s environment of higher interest rates and liquidity issues, these beneficial changes will make it easier to capitalize on the benefits the SBA 504 Refinance Program can provide.