Bailout for Business Real Estate

The Small Business Administration finally rolled out a loan program that could help business owners who face a looming balloon payment on their commercial real estate loans.

Beginning February 28, small-business owners can use the SBA’s 504 program to refinance their commercial mortgages if they face a balloon payment before December 31, 2012. The SBA may later open this option to other business owners.

“We are making this initial restriction to make sure our funding goes first to small businesses with the most need,” said Steve Smits, the SBA’s associate administrator of capital access.

SBA’s 504 loans primarily are used for real estate, but until the Small Business Jobs Act was enacted in late September, they couldn’t be used for refinancing unless a business also was expanding.

Congress added a refinancing option to the 504 program because of the crisis many business owners face due to declining real estate values and the tightening of the commercial real estate financing market. When they took out their current mortgages, most business owners assumed they could refinance the loans before the big balloon payment on the mortgage came due. That’s no longer possible for many of them.

The SBA’s loan programs were created to fill gaps in the lending market for small businesses, so that’s why Congress thought it was appropriate to come to the rescue of these business owners by making $15 billion worth of refinancing available through the 504 program. Since 504 loans, which are made by SBA-approved certified development companies, are paired with first mortgages from conventional lenders, the program will generate nearly $34 billion in total project refinancing over the next two years.

The SBA estimates as many as 20,000 small businesses will take advantage of this refinancing program.

“The economic downturn of recent years and the declining value of real estate have had a significant, negative impact on many small businesses with mortgages maturing within the next few years,” SBA Administrator Karen Mills said. “As a result, even small businesses that are performing well and making their payments on time could face foreclosure because of the difficulties they face in refinancing and restructuring their mortgage debt. This temporary program is another tool SBA can provide to help these small businesses remain viable and protect jobs.”

Borrowers must kick in at least 10 percent of equity in order to qualify for these 504 loans. They will be able to refinance up to 90 percent of the current appraised property value or 100 percent of the outstanding mortgage, whichever is lower, plus eligible refinancing costs. The loans can’t be used for other business expenses.

Applicants also have to be current on their existing loans, and a new independent appraisal will be required on the properties.

Taxpayers won’t be on the hook if these new 504 loans default. All of the costs of this refinancing program will be covered by fees assessed on the loans.

The National Association of Development Companies, which represents the economic development organizations that make 504 loans, expect brisk demand for the refinancing program.

“We have been receiving at least 10 inquiries a week since the refinance provision was announced as part of the Small Business Jobs Act in September,” said Nadco president Chris Crawford. “Small businesses and banks have been clamoring to take advantage of this new, more affordable refinance option as a means to hold on to critical business properties. In many cases, this will mean saving a thriving business from closure if it could not refinance maturing debt. “

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Kent Hoover is the Washington bureau chief for bizjournals.