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504 Debt Refinancing (without expansion) Program
SBA received statutory authority to reauthorize the 504 Debt Refinancing Program for up to $7.5 billion annually. This is in addition to the $7.5 billion authorization for the 504 Loan Program. With this change, total 504 lending has a $15 billion authorization for FY18. SBA published the Interim Final Rule on May 25, 2016, and the Policy Notice on May 26, The Interim Final Rule had a 30-day effective date after publication and SBA launched the 504 Debt Refinancing Program on June 24, 2016. The Final Rule published on May 7, 2018, becomes effective on June 6, 2018. Final Rule for the 504 Debt Refinancing Program published May 7th & is effective June 6th. SBA received statutory authority for up to $7.5 billion annually for the 504 Debt Refinancing Program in addition to the $7.5 billion authorization for the 504 Loan Program.
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504 Debt Refinancing Program
Fees Update As per SBA Information Notice , for loans approved under the 504 Debt Refinancing Program during FY 2018, the total annual guarantee fee is 0.682% (68.2 basis points). SBA will review the fee annually and issue notices of any change. Loan approved under the 504 Debt Refinancing Program in FY18 have a total annual guarantee fee of 0.682% 40 basis points higher than regular 504 Loan Program
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Final Rule Changes 1 2 3 4 5 Qualified Debt Current on All Payments Due Borrower Contribution - Special Purpose Properties Eligible Business Expenses Update Documentation Requirements Update
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1 Qualified Debt Update The definition of “Qualified Debt” was revised to allow loans that were refinanced within 2 years prior to the date of application to be eligible for refinancing if: the effect of the most recent loan was to extend the maturity date without advancing any additional proceeds (except to cover closing costs); and the collateral for the most recent loan includes, at a minimum, the same Eligible Fixed Asset(s) that served as collateral for the prior loan that was refinanced. Definition of “Qualified Debt” revised: Allow loans refinanced during the past 2 years if: Effect of the most recent loan – extend maturity date w/o advancing additional proceeds AND the collateral includes, at a minimum, the same Eligible Fixed Assets that served as collateral for the prior loan
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Q&A Q: For loans that were refinanced within 2 years prior to the date of application, what documents must be provided to show eligibility as Qualified Debt? A: CDCs must submit to SBA copies of the most recent loan and lien instruments, as well as copies of the loan and lien instruments for the loan that was replaced by the most recent loan, to show that the effect of the most recent loan was to extend the prior loan’s maturity date without advancing any additional funds to the Borrower (other than to pay the closing costs of the refinancing). What documentation must be provided to show eligibility as Qualified Debt for a refinance within the prior 2 years? Good news! CDCs only have to submit loan and lien instruments for the most recent loan and the loan that was taken out by the most recent loan. Together, those documents must demonstrate that the effect of the most recent loan was to extend the prior loan’s maturity date w/o advancing additional funds other than for closing costs.
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Current on All Payments Due
2 Current on All Payments Due *Modification or refinance within the year prior to application is eligible: Purpose was to extend the maturity date of the loan No additional proceeds were advanced (except for closing costs); and provided that Applicant has been current on all payments due with no deferments for the 1-year period prior to the date of application *NOTE: This does not apply to debt refinance with expansion under the 504 Loan Program The “current on all payments due” definition was revised to allow a loan to be modified or refinanced within the year prior to application, provided that the purpose of the modification or refinancing was to extend the maturity date of the loan, including any balloon payments, and no additional proceeds were advanced through the modification or refinancing except to cover closing costs. In addition, during the 1-year period prior to the date of application (i.e., in the months prior to and after the modification or refinancing): the applicant is current on all payments due for preceding 12 months, and there have been no deferments of any payments If the Applicant’s note has matured and the borrower has continued making timely payments, the Applicant is NOT considered current, and the loan is ineligible.
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Q&A Scenario 1: Q: My Borrower’s loan will mature in 3 weeks. The Borrower will not be able to come into my office until after that time. If we provide an extension, would this be considered a loan modification that would mean the debt is ineligible? A: The lender may provide an extension, and the loan may still be considered current, provided that the purpose of the modification is ONLY to extend the maturity date of the loan and no additional proceeds are advanced. Scenario 2: Q: My Borrower was unable to refinance its note before it expired; however, the Borrower continued making timely payments. Is this debt eligible? A: No. Note that if the borrower’s note has expired and not been renewed, the loan is not eligible for refinancing even if the borrower has continued making timely payments.
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3 Borrower Contribution – Special Purpose Special Purpose collateral:
Borrower must contribute at least 15% Economic Recession: Borrower contribution may be reduced to 10% When the Eligible Fixed Asset serving as collateral for the Refinancing Project is a Limited or Single Purpose building or structure, the Borrower must contribute at least 15% (excluding administrative costs) toward the Refinancing Project. In the event of an economic recession (as determined by the National Bureau of Economic Research or its equivalent) SBA may publish a Federal Register notice lowering the required Borrower contribution to 10% for such projects. Again, we’re just talking about debt refinance w/o expansion.
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Eligible Business Expenses
4 Eligible Business Expenses Three Things to Consider: Eligible Business Expenses (EBE) can’t exceed 20% FMV of Eligible Fixed Assets securing the Qualified Debt Total project financing (TPL loan + SBA loan) can’t exceed 85% FMV of the fixed assets serving as collateral; AND Cannot increase the value of the project by adding collateral NOTE: No “cash out” permitted in debt refinance with expansion The Debt Refinance (without Expansion) Program allows the Borrower to receive up to 20% of the fair market value of the Eligible Fixed Asset(s) securing the Qualified Debt for Eligible Business Expenses (EBE). To be able to include the financing of EBE, the portion of the Refinancing Project provided by the 504 loan and the Third Party Loan may be no more than 85% of the fair market value of the fixed assets that will serve as collateral; and In addition, the final rule revises the definition of “Refinancing Project” to provide that, if the Refinancing Project includes the financing of EBE, the Borrower may not increase the value of the Refinancing Project by adding any fixed assets as collateral other than the Eligible Fixed Asset(s) securing the Qualified Debt. NOTE: No “cash out” permitted in debt refinance with expansion
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Eligible Business Expenses
4 Eligible Business Expenses Operating expenses that were accrued but not paid prior to the date of application or that will become due within 18 months Examples: repairs, maintenance, minor improvements, salaries, rent, utilities, inventory Includes any operating expense that can be deducted as an expense in the taxable year in which it was paid or incurred Business lines of credit & business credit card debt are eligible Ineligible: capital expenditures such as expenditures for expansion and acquisition “Eligible Business Expenses” (EBE) are limited to the operating expenses that were accrued but not paid prior to the date of application or that will become due for payment within 18 months after the date of application. EBE includes salaries, rent, utilities, inventory, and other expenses of the business that are not capital expenditures. The Applicant may finance any operating expense that it may record and deduct as an expense in the taxable year in which it was paid or incurred, but the Applicant may not finance any capital expense that is used to acquire or improve major assets and which the Applicant may not claim as a deduction in the taxable year in which the expense was paid or incurred. Business lines of credit and business credit card debt are also eligible.
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Eligible Business Expenses
4 Eligible Business Expenses Debt does not qualify as an EBE unless: Incurred with a business credit card or business line of credit and Applicant certifies the debt was exclusively for business uses CDCs must document the nature of the expense and provide an itemization in the credit memorandum. Debt does not qualify as an EBE, unless it was incurred with a business credit card or a business line of credit issued in the name of the small business and the Applicant certifies that the debt was incurred exclusively for business purposes. CDCs must document their determination regarding the nature of the expense in the credit memorandum.
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Eligible Business Expenses
4 Eligible Business Expenses Both the CDC and the Borrower must certify in the application that the funds will be used for EBE. Borrower may be asked to show that loan proceeds provided for EBE were actually used for EBE Loan proceeds must not be used to refinance any personal expenses. Both the CDC and the Borrower must certify in the application that the funds will be used to cover EBE. SBA will rely upon the CDC and the small business to represent the nature of the expense and that the expense may be deducted as an ordinary and necessary expense during the taxable year in which it was paid or incurred. However, after loan closing, the Borrower must, upon the SBA’s request, substantiate the use of the funds provided for business expenses. For example: bank statements, invoices marked “paid”, cleared checks, or any documents that a business obligation was satisfied with the funds provided. Loan proceeds must not be used to refinance any personal expenses.
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Q&A Q: What is the documentation requirement for Eligible Business Expenses (EBE)? Is a gross figure acceptable, or must expenses be itemized? A: CDCs must document the nature of the EBE, provide an itemization of the expenses, and certify that they are eligible in the credit memorandum. Additionally: At application, the Borrower must certify that the debt is eligible The TPL must certify the EBE is eligible in its commitment letter EBE documentation should be retained at the CDC so it is available if requested by SBA. The TPL and CDC do not have to monitor how EBE funds are spent
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5 Disbursement Period Disbursement Period - Increased from 6 months to 9 months May request an exception to policy for an extension for an additional 6 months for good cause Total allowable months with an exception to policy is 15 months
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Topics that Did Not Change per Final Rule Final Rule Effective June 6, 2018
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504 Debt Refinancing Program
Policy and Information Notices replaced by SOP (J): Policy Notices and were updated in SOP (J), effective January 1, 2018. The Federal Register Notice issued May 7, 2018, effective June 6, 2018, further updates program policy, as noted in the previous updates section. Two policy Notices – rolled into SOP (J) Policy Notice : effective May 26, 2016 – Reauthorization of 504 Debt Refi Program Policy Notice : effective Nov. 17, 2016 – Changes to 504 Debt Refi Program Eligibility – New Business LTV for financing of “Business Operating Expenses” Appraisals – may be dated within 1 year of loan approval Option to use interim loan or escrow account for same institution debt Guidance for waiving requirement of the 50% rule for CDC’s new financing
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504 Debt Refinancing Program
Three statutory requirements include: Zero-subsidy CDC limitation on 504 refinance loans: Can approve up to 50% of the CDC’s previous fiscal year approved loans unless waived for good cause 504 alternative job goal allowed under the Jobs Act was eliminated. Will cover each of these statutory modifications in the following slides
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504 Debt Refinancing Program
Zero Subsidy Requirement The Debt Refinancing Program shall be in effect only in any fiscal year in which the subsidy costs to the Federal Government of making guarantees under the Debt Refinancing Program and under the 504 Loan Program is zero. The zero subsidy requirement is a statutory requirement that the 504 Debt Refinance Program can only be in effect in fiscal years when the subsidy rate is zero for BOTH the 504 Loan Program and the 504 Debt Refinancing Program
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504 Debt Refinancing Program
50% Limit of Prior FY CDC Dollars Loaned (Approved Loans) Limitation of a CDC’s financings under the Debt Refinancing Program to 50% of the total dollars the CDC loaned under the 504 Loan Program (including the 504 Debt Refinancing Program) during the previous fiscal year. Congress has authorized for waivers to this limitation. Waiver requests must be submitted via eTran to SLPC for consideration. CDC limitation on 504 refinance loans: Can approve up to 50% of the CDC’s previous fiscal year approved loans unless waived for good cause Previous fiscal year approved loans includes total approved loans for both the 504 Loan Program and the 504 Debt Refi Program
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504 Debt Refinancing Program
Waivers to 50% Limit of Prior FY CDC Dollars Loaned (Approved Loans) SBA issued waiver guidance in SOP (J), p. 300. SBA will consider the following factors in determining whether there is good cause for the Borrower to obtain the refinancing through the CDC that exceeds the 50% requirement: Whether the Borrower has access to other sources of financing, including other CDCs that have not exceeded the 50% cap; and Whether the CDC has an existing 504 loan with the Borrower that is in current status. Waiver guidance – page 300 current SOP Focus of the determination will only be on the Borrower’s financing needs (not the circumstances of the CDC) Can be waived depending on: Whether the Borrower has access to other sources of financing, including other CDCs Whether the CDC has an existing loan with the Borrower that is in current status
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504 Debt Refinancing Program
Job creation and retention for both 504 Loan Program and 504 Debt Refinance Program All 504 projects must adhere to 504 Loan Program job creation and retention requirements; however, If the CDC’s portfolio meets the total jobs bank requirement, then any one of the Public Policy Goals (with the exception of Energy Efficiency) may be used. All 504 projects must adhere to 504 Loan Program job creation and retention requirements; however, If the CDC’s portfolio meets the total jobs bank requirement, then any one of the Public Policy Goals (with the exception of Energy Efficiency) may be used
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504 Debt Refinancing Program
Other Application Documentation Requirements Appraisals: Appraisals are not required at time of application. Appraisals dated within 12 months of the date the application was approved are required prior to closing, and appraisals must otherwise comply with the requirements for appraisals set forth in SOP (J). Transcripts: See updated Streamlined Documentation Process in SOP (J). Lien Verification: See updated Streamlined Documentation Process in SOP (J). Appraisals: Not required at time of application but are required prior to loan closing Must be dated within 12 months of the date of application Must comply with the requirements set forth in the SOP Nothing changed for the requirements for transcripts or lien verification
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504 Debt Refinancing Program
PCLP Restriction Loan applications for assistance under the 504 Debt Refinancing Program must be processed by SBA and may not be approved by CDCs under PCLP authority. Loan applications must be processed by SBA CDCs with PCLP authority must submit applications to SBA for processing
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504 Debt Refinancing Program
Occupancy Requirements Borrowers for the 504 Debt Refinance Program must meet all current 504 Loan Program occupancy requirements at the time of application.
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504 Debt Refinancing Program
FORM CHANGES
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Form 1244 Update At application, the Borrower and CDC must certify that the debt is eligible (Exhibit 2 of SBA Form 1244); and Third Party Lender must certify in its commitment letter that it has no reason to believe that the debt is not eligible (Exhibit 17 of SBA Form 1244), as instructed in SBA Form 1244 Part D. The loan documents and lien instruments required under Exhibit 21 of SBA Form 1244 must also be submitted to SBA as part of the application Form 1244 updated to allow the borrower and CDC to certify that the EBE are eligibile to reflect the required loan documents and lien instruments are being provided
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FORM 2234 C Update vi. If the Refinancing Project includes financing for Eligible Business Expenses (as defined in CFR § (g)), the expenses are eligible for financing and are included in a detailed and itemized list in the Credit Memorandum, and do not exceed the amount allowed under 13 CFR § (g) vii. The funding for the Refinancing Project includes an amount from the Third Party Lender equal to or greater than the 504 net debenture amount and not less than either 10% or 15% from the Borrower as required by 13 CFR § (g) Revised to address Eligible Business Expenses; and Minimum Borrower contribution and Third Party Lender loan size
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504 Debt Refinancing Program
EXAMPLES 504 Debt Refinancing Deal Structures
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504 Debt Refinancing Program
Request Refinance $100K existing acquisition mortgage plus $400K 2nd mortgage borrowed 5 years ago for property renovations. Property is appraised at $1,000,000. Acceptable Structure Appraised Value of Property $ 1,000,000 Qualified Debt $ ,000 Qualified Debt $ ,000 Total Loan Proceeds $ ,000 Third Party Loan $ ,000 SBA 504 Loan $ ,000 Borrower Equity Contribution $ ,000 Comments All eligible. Project financing (TPL loan debenture) is $500,000. TPL loan amount must be equal to or greater than the debenture amount, at least $250,000 in this example. All debt is eligible – original use of loan proceeds is eligible, age of debt is eligible, TPL is equal to or greater than the SBA debenture
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504 Debt Refinancing Program
Request Refinance $300K existing Qualified Debt plus $400K for a business line of credit and other Eligible Business Expenses. Property is appraised at $1,000,000. Acceptable Structure Refinancing Project (Appraisal) $ 1,000,000 Qualified Debt $ ,000 Eligible Business Expenses $ ,000 Total Loan Proceeds $ ,000 Third Party Loan $ ,000 SBA 504 Loan $ ,000 Borrower Equity Contribution $ ,000 Comments The $300K Qualified Debt can be included but only $200K of the requested $400K in Eligible Business Expenses can be included. Eligible Business Expenses are limited to 20% of the Refinancing Project amount. In this case $200K. Total LTV remains below the 85% maximum for transactions involving Eligible Business Expenses. We have Eligible Business Expenses, which can only be 20% of the value of the Eligible Fixed Assets, and the total financing (TPL plus SBA) limited to 85% LTV.
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504 Debt Refinancing Program
Acceptable Structure #1 with $350K cash to close Refinancing Project (Appraisal) $ 1,000,000 Qualified Debt $ ,000 Third Party Loan $ ,000 SBA 504 Loan $ ,000 Borrower Equity Contribution $ ,000 Acceptable Structure #2 add eligible fixed assets Refinancing Project $ 1,389,000 Qualified Debt $ 1,250,000 Third Party Loan $ ,500 SBA 504 Loan $ ,500 Borrower Equity Contribution $ ,000 Request Existing business to refinance three Qualified Debt mortgages totaling $1,250K. Loan #1 to buy the land, Loan #2 to build the building, Loan #3 for property improvements. Property is appraised at $1,000,000. Comments Applicant would have to put in $350K cash or add additional eligible assets with an appraised value sufficient to increase the Refinancing Project to $1,389K and maintain the required 10% equity. 90% LTV acceptable as no funds provided for Eligible Business Expenses and the property is not special purpose. Existing business, no special purpose or limited use assets Issue: Insufficient collateral to refinance all debt as proposed. Structure #1: Decrease total financing Structure #2: Increase borrower contribution by adding eligible fixed assets
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504 Debt Refinancing Program
Acceptable Structure Refinancing Project (Appraisal) $ 1,000,000 Qualified Debt $ 800,000 Total Project Financing $ 800,000 Third Party Loan $ 450,000 SBA 504 Loan $ 350,000 Borrower Equity Contribution $ 200,000 Request Refinance $800,000 in Qualified Debt on a bowling alley. Property is appraised at $1,000,000. Comments The request can be structured to meet program guidelines. Borrower contribution (equity) must be at least 15% reducing the SBA share to no more than 35%. Equity above the 15% required may reduce either the TPL or SBA share as long as the TPL is equal to or greater than the SBA. Bowling alley – Special Purpose or Limited Use Asset – borrower contribution must be at least 15%. Equity above the 15% required contribution may be used to reduce either the TBL or 504 loans as long as the TBL is equal to or greater than the 504 loan, and the SBA loan is not more than 35%.
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504 Debt Refinancing Program
Acceptable Structure Refinancing Project (Appraisal) $ 1,000,000 Qualified Debt $ ,000 Eligible Business Expenses $ ,000 Total Loan Proceeds $ ,000 Third Party Loan $ ,000 SBA 504 Loan $ ,000 Borrower Equity Contribution $ ,000 Request Refinance $700,000 in mortgage debt originally taken out 5 years ago and refinanced 10 months ago for better rate and terms plus $200,000 to cover Eligible Business Expenses, some of which will be incurred in the following 6 months. Property is car wash business appraised at $1,000,000. Comments The mortgage debt would be a Qualified Debt if the earlier refinancing was, in effect, a replacement for the prior loan with no new funds advanced (other than closing costs). Only $150,000 of the request is eligible as this project is limited to no more than 85% LTV. As a special purpose property the Borrower contribution must be at least 15% and SBA cannot exceed 35%. Considerations: Does the debt meet the definition of current? (refinanced w/in past 12 months w/no new funds advanced) EBE – 20%/LTV 85% Special Purpose or Limited Use Asset – 15% borrower contribution, SBA loan cannot exceed 35%
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Debt Refi w/o Expansion Debt Refi with Expansion
Max Borrower contribution required 15%, unless SBA determines risk mitigation requires more Max Borrower contribution required 20% Federally guaranteed loans ineligible Federally guaranteed loans eligible if allowed by originating Federal Agency TPL loan can be reduced to less than 50% of project cost provided: the TPL loan is equal to or greater than the SBA loan, AND SBA not to exceed 40% of the total project cost or 35% for Special Use properties TPL loan must be at least equal to 50% of Project costs Subject to supplemental annual fee. Current total annual fee is 0.682% No supplemental annual fee. Current total annual fee is 0.642% Borrower contribution: With Expansion – new borrower and special purpose assets each require an additional 5% contribution, and the maximum borrower contribution that can be required is capped at 20% W/O Expansion – a new borrower with special purpose assets is only required to contribute 15%
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Debt Refi w/o Expansion Debt Refi with Expansion
“Eligible Business Expenses” up to 20% of appraised value of the Eligible Fixed Assets w/max LTV of 85%. Collateral must be fixed assets securing the Qualified Debt. No additional collateral can be added to meet LTV requirements. No “cash out”. Costs such as prepayment penalties, financing fees or other refi costs required by original debt instrument may be included. Min. 2 year requirement: Age of original eligible debt, time debt secured by the same Eligible Fixed Asset & time applicant in business “Substantial benefit” test – must provide better rates or terms – 10% lower payment Borrower must be current on all payments for preceding year as of date of app. Loan may have been modified/refinanced within the year if no additional funds disbursed and if purpose was to extend maturity date. Borrower must be current on all payments due on the existing debt for not less than 1 year or for the time the debt has been open if less than 1 year. No allowance for modification or refinance to extend maturity date.
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Q&A Q: Has the Agency considered revising the current structure to once again permit “Other Secured Debt?” A: No. “Other Secured Debt” was eliminated in the Eligible Business Expenses. Business Operating Expenses has remained in place.
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Q&A Q: The purpose of the refinance is for a partner buyout. Is this eligible? A: Depending on the circumstances, the Borrower may no longer meet the requirement to be in business for at least 2 years. A business may be considered a new business if the buyout will result in new or unproven ownership/management or increased debt unrelated to business operations. If a key decision-maker is leaving the business, the business may be considered new. Page 256 of SOP: New Business – in operations for 2 years or less at loan approval. May be considered new business if a change of ownership will result in new, unproven ownership/management and increased debt unrelated to business operations. “If there is a change of ownership, the CDC must review the management and level of debt and make a determination whether an additional borrower’s contribution of 5% is necessary.”
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Q&A Q: The fair market value of the collateral for the proposed loan will not support the refinance. How can the borrower address the collateral shortage? A: It depends. Collateral for the most recent loan must include, at a minimum, the same Eligible Fixed Asset(s) that served as collateral for the prior loan. If no EBE, options include adding eligible collateral, and/or subordinated debt if it meets criteria for “borrowed equity” per the SOP (demonstrates repayment ability, not repaid faster than the 504 loan, etc.) However - If the Refinancing Project includes the financing of EBE, the 504 loan and Third Party Loan may be no more than 85% of the fair market value of the fixed assets that will serve as collateral, and the Borrower may not increase the value of the Refinancing Project by adding any additional assets as collateral.
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Contacts For more information about the 504 Debt Refinancing Program contact: Linda Reilly, Chief of 504 Program Branch David Miller, Supervisory Loan Specialist Babak Hosseini, Finance and Loan Specialist, 504 Program Branch Ginger Allen, Finance and Loan Specialist, 504 Program Branch
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