Refinancing Mortgages on Commercial Real Estate
The Small Business Administration has eased the rules for its 504 loan program to facility refinancing. For the first time, small businesses can use this loan program to generate working capital. Chris Hurn of Mercantile Capital Corporation, an SBA lender in Orlando, Florida, said the new opportunity to refinance will help owners turn their real estate equity into working capital.
The SBA’s 504 loan program is a long-term financing vehicle made through a Community Development Corporation, which is a private, nonprofit corporation which is set up to contribute to economic development within its community. Usually, there is a first (senior) loan for 50% of the cost of the project. Then the 504 loan can provide up to 40% of the cost of the project; the 504 loan is 100% guaranteed by the SBA. In effect, the small business borrower only has to come up with 10% of the cost of the project.
The program can be used to buy or improve realty or long-term machinery and equipment. Until now, the program could not be used for refinancing. However, under a temporary program set to run through September 27, 2012, the program is available for the refinancing of a commercial mortgage that is more than two years old. Under a rule adopted on October 12, 2011, borrowers can finance up to 90% of the appraised value of available collateral, which could include fixed assets acceptable to SBA, such as commercial real property. This allows borrowers with more than 10% equity to be able to obtain additional proceeds to pay for eligible business expenses.
Under the 504 loan program, repayment is made over 20 years. There is no cost to the borrower for refinancing. The current interest rate is 4.69%, an all-time low.