SBA Opens Temporary Refinancing Program to Real Estate Mortgages Maturing after December 2012

SBA Opens Temporary Refinancing Program to Real Estate Mortgages Maturing after December 2012

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Release Date: March 29, 2011
Contact: David J. Hall (202) 205-6697
Release Number: 11-22
Internet Address: http://www.sba.gov/news

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WASHINGTON, D.C. –Small business owners with eligible commercial real estate mortgages maturing after Dec. 31, 2012, will be able to secure more stable, long-term financing through the U.S. Small Business Administration’s temporary 504 refinancing program as a result of a change that will be published in The Federal Register by April 6.

In February, SBA implemented a temporary refinancing program enacted under the Small Business Jobs Act of 2010, which allowed small businesses facing maturing commercial real estate mortgages or balloon payments before Dec. 31, 2012, to refinance with an SBA 504 loan. The SBA change will lift the date limitation and will allow more small businesses to secure stable, long-term financing and avoid potential foreclosure on mortgages approved before and during the recession that were based on inflated real estate values.

“With the collapse of the real estate bubble, many small business owners have found themselves unable to refinance as a result of inflated real estate values at the time they took out their mortgage,” SBA Administrator Karen Mills said. “SBA’s temporary 504 refinancing program was first made available to those small businesses with the most immediate need. Today’s step opens this critical assistance to more small businesses, giving them the opportunity to restructure their debt and free up capital that will be essential to keeping their doors open and also their future ability to grow and create jobs.”

To be eligible for the temporary 504 refinancing program, a business must have been in operation for at least two years, the debt to be refinanced must be for owner-occupied real estate and have been incurred no less than two years prior to the date of application and the proceeds used for 504-eligible business expenses, and payments on that debt must be current for the last 12 months.

The refinancing loan is structured like SBA’s traditional 504 loan. Typically, a 504 project includes three elements: a loan (or first mortgage) secured with a senior lien from a private-sector lender covering 50 percent of the project cost, a second mortgage secured with a junior lien from an SBA Certified Development Company (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business borrower.

Borrowers are 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. Loan proceeds may not be used for other business expenses. Existing 504 projects and government-guaranteed loans are not eligible to be refinanced.

Under the Jobs Act, Congress authorized SBA to approve up to $15 billion in loans under this program ($7.5 billion in both fiscal years 2011 and 2012). Together with the first mortgage, this temporary program will provide up to $33.8 billion of total project financing. Additional fees charged to the borrower will cover the cost of this refinancing program and as a result no loan subsidy will be needed from taxpayer funds. The program is expected to benefit as many as 20,000 businesses.

SBA’s traditional 504 loan program is a long-term financing tool, designed to encourage economic development within a community. A 504 loan provides small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.

With publication in the Federal Register, which is expected by April 6, SBA will begin accepting applications from small business owners with mortgages maturing after Dec. 31, 2012. The program will be in effect through Sept. 27, 2012.

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MULTIFAMILY PROPERTIES OUTPERFORM OTHER INCOME PRODUCING PROPERTY TYPES

by Paul Braungart, President, Regional Capital Group

In the current commercial real estate market multifamily properties appear to be outperforming other income producing property types. Investors have targeted apartment projects for acquisition partly due the availability of funds for this sector of the marketplace. In the past 18 months there has been some downward pressure on property values as a result of a decrease in average rental rates and an increase in the vacancy rate across some markets. Many in the industry feel that from an economic standpoint, the worst is over for multifamily properties and that a small recovery has begun in this sector, but it may not be fully realized until 4th quarter of this year or until early 2011. Buyers and sellers appear to be motivated to work together to complete transactions.

Over the past year many markets have experienced a decrease in capitalization rates as the demand for higher quality projects among the larger players has heated up. Existing apartment properties have a distinct advantage over new projects due to the barriers to entry including a difficult and lengthy process of project approvals along with the challenge of finding construction financing.
With supply being somewhat constrained, it is expected that the children of baby boomers will have a major impact on the multifamily industry. As a result household demographics expect a substantial increase in new renters over the next 10 years which will contribute to the growth of the industry. Employment rates appear to be declining while new job creation has helped tremendously to improve this sector of the commercial real estate market. Those new to rental housing have exhibited more confidence in the economy and have helped the decline of vacancy rates. The housing market is still struggling and the lack of homebuyers contributes to the growth in multi-family occupancy rates. Declining housing starts, weak existing home sales, and difficulty in obtaining residential mortgages have also helped the rental housing market.

Although most of the commercial real estate markets are in flux, the multifamily arena continues to be a positive indicator that real estate capital is available in the market. The most active players are the agencies including FNMA, FHLMC, and HUD which are typically financing acquisitions or refinances. The life companies have also stepped back into the game with lower leverage loans, but have shown a steady stream of loan closings. The CMBS market has reappeared on a smaller scale as well as a number of bridge lenders, all capable of closing in a shorter period of time. Leverage, sponsorship, and performance are all critical factors when trying to secure financing in today’s market. Equity is also available for multifamily and student housing project types in proven markets. The interest rates are still very attractive and most of the commercial real estate closings in the market are for this sector.

Several of our clients and partners are looking to acquire new projects either performing or non-performing. RCG continues to be very active in all sectors of the multifamily marketplace as historically the firm has been a real estate opportunity fund manager participating in all pieces of the capital stack. RCG has expanded its services to coordinate the funding for both short and long term loans for borrowers and to really meet every financing need a borrower may have.

Small Biz Jobs Bill Approved! Will it help?

Finally, after months of discussion and debate, a new small business initiative was launched yesterday, as President Obama signed the Small Business Jobs Act of 2010 into law!    The bill has several major components, including the creation of a “small business lending fund”, SBA loan program changes to both the 7(a) and 504 loan programs, temporary tax breaks for small business investments and more favorable tax treatment of certain business expenses.    But what will the net effect be to small businesses that need money, especially those that own or want to own commercial real estate?

Small Business Lending Fund – First, let’s address this new pot of money available to small banks.  Under this program, banks with assets under $10 billion will be able to obtain very attractive additional funds from the U.S. Treasury.     To qualify, banks will have to submit a ‘small business lending plan’ to Treasury.   This truly should stimulate some additional small business lending by smaller, capital-constrained banks.    Unfortunately, it does not appear the Treasury will be able to require that certain lending targets be met by banks, so there is a risk that the capital will be borrowed by banks but (much like with some TARP funds) not re-deployed to borrowers/businesses.   However, from initial feedback in the marketplace, some banks are in fact putting plans together to immediately ramp up lending once they receive these new Treasury funds.    Will they be a little less conservative in their underwriting, though?    Will more businesses qualify for financing?    Unfortunately, this is not at all certain.     

Increased Loan Guaranties – Also impacting the banks and potentially their willingness to lend is the increase in the percentage of the government’s guarantee on SBA loans, from 75% to 90%.    This is meaningful to banks but is only being offered per the bill until the end of 2010.     So, while it could help push banks to be a tad more aggressive in their lending standards, in reality there is no time for it to have any real effect.  

SBA Loan Limit Increases – The bill makes some temporary and some permanent changes to the most popular SBA loan programs – the 7(a) and 504 programs.    The biggest news is the permanent change to the maximum loan sizes allowed under each program.  The 7(a) program will now allow loans up to $5 million, and the 504 program will now also allow loans to $5 million (but given the structure of 504 loans, that translates into development projects or purchases of $12.5 million potentially now qualifying.)    These loan limit increases will definitely benefit small businesses refinancing or acquiring commercial real estate, some of whom had needs for higher dollar amount that the SBA programs could historically accommodate.    

SBA 504 Loans for Refinances – Also benefitting businesses owners that own their real estate, the 504 program will for two years be available for use in refinancing commercial mortgages that meet certain somewhat strict criteria.   Though only a small % of businesses will be eligible, the main benefit of using the 504 program for refinances is in providing small businesses with fixed-rate loans at record low interest rates (recently under 5% fixed for 20 years.)     Although temporary and narrow in eligibility, count this as a small win for small businesses with commercial real estate.

Elimination of SBA Loan Fees – Another notable element of the bill is the temporary elimination, yet again, of the loan fees associated with SBA loans.     These fees, up to 3% of the total financing, will be waived but only through the end of 2010.      This means that applicants only have a couple of months to start the loan application process if they want to benefit from these reduced fees.     This is a great benefit for businesses, especially those borrowing larger amounts (loan fees on a $2 million loan would otherwise be over $50,000), but the short-lived nature of the provision is a frustrating déjà vu from earlier bills waiving these fees only for short periods.

Bottom line?   The bill should provide some stimulus to small business lending, with some banks putting their toe back in the lending water, more businesses becoming eligible for financing, and more financing requests becoming eligible for approval.   However, in counterbalance, some very helpful features will be short-lived, and there is not significant emphasis placed on incenting banks to expand qualification criteria for businesses or find opportunities to qualify more borrowers than they do today.

Senate Stuck on SmallBiz Reform Bill – Need Your Support!

The Senate is this close to finally making more capital available to small businesses – but they need a push from US.    (See below for what you can do.)    The Senate was hoping to end debate by yesterday on the Small Business Legislation bill currently under discussion (Small Business and Jobs Creation Bill – H.R. 5297)    However, the vote to end debate and move forward fell two votes short today, meaning the back and forth will continue for now.     As part of the bill, a number of provisions and amendments are being discussed that would help small businesses borrower money, and unlike the American Reinvestment and Recovery Act (ARRA), many such provisions to help small businesses access capital would be cost neutral to the taxpayers.

Two importants loan programs for small business borrowing are the SBA 7a and SBA 504 programs.    One critical change to these programs is to increase the amount businesses can borrow.    For example, the 7a program is capped at $2 million, and it has been capped there for over 6 years.    Raising this would allow SBA loans to help many more businesses AND not cost the gov or taxpayers money.    Additionally, the 504 program is currently allowed for use in refinancing Commercial Real Estate (CRE) only in rare cases.   Primarily, it is a tool for buying and developing property for use in business.    This bill could include a change to allow the 504 program to be used for refinancing CRE – a critical need for many of the country’s businesses facing expiring loans without lenders ready to step up with refinance options.

Help us support small businesses and access to capital for business and property owners – through measures that will be cost neutral or even profitable for the government – by contacting your Senators  in the next 24 hours!   Express your support of this Bill and the associated measures to increase SBA loan limits and expand SBA loan eligibility.     Find your Senator here – Senator List

Fear Gives Way to Greed

By Joe Caton

Scarce capital no longer to blame for investors’ indecision

Not only have signs of life returned to commercial real estate finance, but there are also signs that the capital markets are on the mend. As 2010 began, analysts called for about $20 billion in new issuance of commercial mortgage-backed securities (CMBS). But by the beginning of the second quarter, those estimates rose to $25 billion, and may rise even further.

CMBS issuance is a major barometer of real estate finance because it is one of the most orderly and low-cost funding sources available. With the winding down of the Term Asset-Backed Loan Facility over the next two months, investors are looking to CMBS for stable government-free opportunities.

[BLOGGER COMMENT: As liquidity and leverage return to commercial real estate – now the question will be: “Who will blink first… Sellers? or the Opportunity Fund buyers that have raised trillions and deployed a small fraction of their allotted capital?]

READ ARTICLE IN NREIONLINE

SBA Help Expiring, Proposals Evaporating…

The SBA had been waiving fees to borrowers and increasing guarantee %’s to lenders.   But the money has run out.    Politicians on both sides of the aisle have proposed extending these benefits at least through 2010, and a number of other potentially beneficial changes were proposed in late 2009 and early 2010.    (Additional proposed changes have included increasing the loan limits for the largest SBA programs – 7a and 504 loans – and allowing the expanded use of 504 loans for commercial real estate refinancing.)

But the money has run out.   The changes from the 2009 economic stimulus bill and the extensions that took them through February have expired.     And the jobs bill that did have extensions and enhancements included within it hit a brick wall late last week when Senate Majority Leader Harry Reid stripped out SBA provisions.      (That bill just hours ago saw strong bipartisan support with a “test-vote” of 62-30. )     The bill pared down costs $15 billion.    Extending the 90% guarantee and fee waivers through 2010 costs only $375 million, so money is not the issue.    Putting the SBA funds back in wouldn’t even be noticed.

Unfortunately, the issue appears to be solely political, as the SBA initiatives appeared to have bipartisan support in the Senate.     Some suggest politicians are holding back, waiting to use the SBA funding as a carrot in a later initiative.     Regardless of the reason, it is extremely unfortunate that government money actually making a difference to small businesses is being held back.    You can’t trace the billions to banks to renewed lending activity, but you can see a dramatic increase in SBA lending interest by banks with the increased government guarantees.

And the waiver of fees, did that make a difference?     Ask John C., who is the owner of a Manhattan restaurant we are now refinancing with an SBA 7a loan.     He was approved a week before the deadline, and therefore he will not have a government guaranty fee on his $1.6 million loan.   If he was approved now for that loan, he would face a fee to the government of roughly $42,000.

Concern Aired Over Banks’ Real Estate Loans

A New York Times article from Feb 11th has an interesting title and the typical mainstream media focus on the glass being half full… buried in the story is the ray of light investors have been looking for:

Mr. Fine said he thought that more than 90 percent of an estimated 8,000 community banks “are strong, stable and growing.”

This means the media’s focus on the negative ignores the fact that the great majority of our lenders are not in trouble. While many high profile loans are underwater the vast majority of commercial real estate loans were prudently underwritten and still provide substantial debt coverage.

New lenders are entering the market every day. Current underwriting standards change on a daily basis, but it is safe to say that strong Sponsors with A properties in A locations that do not require massive leverage will be pleased by the rates and terms available in the market.