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Why the SBA 504 Refinance Program Has Failed

The SBA 504 refinance program was signed into law in September 2010 and has been, for the most part, a complete failure.   One year after it was announced, there’s been approximately 60 loans funded nationally…  At approximately $50 million in total debt issued.  A drop in the bucket compared to the $15 billion initially allocated to the program.   

Prior to it rolling out, most industry insiders considered this to be virtually the holy grail of owner user commercial real estate financing.  It was going to “save” the small business lending industry and save thousands of loans for borrowers that could not qualify for conventional loans (Largely due to declining property values).

Low long term fixed rates, with 20 to 25 year amortization schedules and of course at

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tantalizingly high leverage at 90% made all of us drool. 



What happened?   


How could it go from being the biggest no brainer in decades to being utterly dormant?  (For example there has been 3, that’s right 3, SBA 504 loan refinances completed in the entire state of Arizona as of September 1, 2011 since it was rolled out a year ago.  The answer is that there has been utter confusion and several technical restrictions (otherwise known as  “gottcha’s”) that have eliminated virtually 99% of all loan requests.  Here are few of the most prominent issues that we’ve seen: 

  1.  Major delay/ lag from the SBA from when the program was signed into law and when the “small print” was actually rolled out and they began accepting loan submissions; which was in February 2011.  So the program which has a two year time limited wasted 6 months as it just sat in limbo.   No one outside the SBA had any real idea what was going on and we all just waited for the program to be rolled out.   It’s very hard not to speculate why this happened.  Was it just bureaucracy at its worse or was there real concern that the SBA would be overrun with deals?  Or something else? 
  2. This next restriction was perhaps the biggest blow/let down of the 504 program.   It was that  the borrowers existing loan had to be ballooning before 12/31/2012 to qualify.  This alone eliminated probably 90% of all the loan requests in the nation.  It was later switched to just requiring you to have a balloon, than was eliminated completely.
  3. The lineage of the existing loan has to be eligible under the traditional SBA 504 rules.  Existing debt had to have been used to finance hard assets such as real estate and equipment.  Meaning if part (More than 15%) of your existing debt was ever used to finance working capital, for example and even if that loan has been refinanced 3 times since, then that portion of the debt was ineligible and killed your entire SBA 504 refinance.  This rule is still in effect and is still killing transactions.
  4. The appraisal had to be ordered before the loan was approved. And delivered when the loan was submitted to the SBA.  This was a major turn off for many borrowers as they didn’t want to risk the cost of the appraisal, before they had any real indication that there loan would be approved.   This rule has since been removed and you can wait until after the approval has been delivered.
  5. You cannot refinance an existing government loan with the SBA 504 loan.  So if you have a variable rate SBA 7a loan, you cannot refinance that debt with the 504.
  6. The local CDC roles where reduced in the submittal and approval process.  Loans had to be approved directly by the SBA.  Though the back office of the SBA works surprisingly well at times, not having the local CDC’s do their jobs interrupted the flow and momentum of many transactions and put further doubt in borrower’s minds on the viability of their transaction. 

We do SBA loans and appreciate what the SBA has done historically to help small business.  This is not meant to be just a slam on the agency.  But it really has been a shame on how much anticipation the program had, coupled with how many small businesses the program could have helped.  All in all, it has wasted tens of thousands of hours as borrowers submitted loan request that where declined.  They could have used that time in trying to improve their business.  Seems like such a waste.  Hopefully more of the  kinks will be worked out before the program expires.

By Jeff Rauth
Commercial Finance Advisors, Inc      

 

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