DEBT REFINANCE APPLICATIONS
How to Avoid
Screenouts
Topics to be Covered
Why revisit debt refinancing
Amount of debt that can be refinanced Debt refinancing requirements
Documentation to be submitted to SLPC
– Lien Instruments
– Promissory Notes
– Transcripts of account
– Substantial Benefit Worksheet
Why Revisit Debt Refinance?
Even though debt refinancing has been part of the 504 Loan Program for more than a
year, according to our partners at the SLPC, almost all 504 applications involving debt refinancing are being screened out
This causes delays in processing and frustration for all parties involved and is
easily remedied with a proper understanding of what is required
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Debt Refinancing
504 Projects currently may include a limited amount of debt refinancing as an eligible 504 Project Cost
The 504 Project must involve expansion of a small business
– “Expansion” is broadly defined to include any
Project that involves the acquisition, construction or improvement of land, building or equipment for use by the small business
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Amount of Debt That Can Be
Refinanced
Any amount of existing debt that does not exceed 50% of the cost of expansion may be refinanced
The cost of expansion is all Project Costs other than the debt being refinanced, i.e., the new money being borrowed for:
– Purchase of land or land & building
– Construction/remodeling
– Purchase/install equipment or fixtures
– Professional Fees
Amount of Debt That Can Be
Refinanced
cont.
Land/Building Equity 351,667
Building Construction 2,000,000
Debt Refinance 1,055,000 ***
Professional Fees 30,000
Interest/Fees on Interim Loan 80,000
Debt in Excess of 50% 212,000
TOTAL PROJECT COST $3,728,667
***The eligible refinance amount is 50% of $2,110,000. Land/Bldg equity and excess Consolidation of
Pre-Existing Debt do not apply towards “Expansion Costs.”
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Debt Refinancing Requirements –
All Requirements Must Be Met
(1) The debt being refinanced was used for 504-eligible fixed assets: to acquire land, including a building, to construct a building or to purchase equipment/fixtures
(2) The existing debt was incurred for the benefit of the small business
(3) The existing debt is collateralized by the fixed assets
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Debt Refinancing Requirements – All
Requirements Must Be Met
cont.
(4) Borrower has been current on all payments
on the existing debt for not less than 1 year (5) Refinancing will provide a substantial
benefit to Borrower
(6) Refinancing will provide better terms or rate of interest than the existing debt
(7) The 504 Loan proceeds will be used only for cost of expansion and refinancing
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Debt Refinancing Requirements – All
Requirements Must Be Met
cont.
(8) The 504 Loan proceeds are not used to refinance debt owed to:
– An Associate of the 504 Loan applicant
– An SBIC
– Any creditor in a position to sustain a loss causing a shift to SBA of all or part of a potential loss from the existing debt
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Documenting Debt Refinancing
Requirements at Application
For non-PCLP Loans, CDC must include a conclusion in its credit memo that the
proposed debt refinancing meets all the requirements, together with supporting analysis and documentation
For PCLP loans, PCLP CDC must address the debt refinancing requirements in the
Eligibility Information Required for PCLP
Submission (SBA Form 2234, Part C) sent to SBA, and must maintain the analysis and
Recommendation!
A checklist outlining each of the components for the debt refinance request – how the
requirements are being met - should be
included as a cover sheet in Exhibit 24 of the 504 loan application
A sample of a checklist is included in your webinar materials, so let‟s look at it now
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(1) Existing Debt Used To Purchase
504-Eligible Assets
The existing debt must have been used to acquire 504-eligible fixed assets
The existing debt does not need to be for assets at the same location or for the same type of property as the 504 Project as long as the business operation at the other location has the same NAICS code as the business operation at the Project location
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(1) Existing Debt Used To Purchase
504-Eligible Assets
cont.
Existing debt may include instruments that will result in transferring ownership of the property to the small business, including:
– Land sales contracts
– Contracts for deed
– Capital leases
The purchase of land under an operating lease is eligible for 504 financing, but the operating lease itself is not eligible for debt refinancing
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(1) Existing Debt Used To Purchase
504-Eligible Assets
cont.
An existing debt is disqualified from
refinancing if it was used for working capital or any other purpose not eligible for 504
financing
BUT where a portion of the existing debt was used for 504-eligible fixed assets, that
portion of the existing debt is eligible for refinancing
Documenting Proceeds Were Used To
Acquire Eligible Assets
As part of Exhibit 24, provide the SLPC:
– For real estate with:
Copy of the recorded deed or land sale contract, contract for deed or capital lease showing the applicant‟s interest in the real estate
Copy of recorded lien instrument (e.g.,
mortgage or deed of trust) for the debt being refinanced that shows the original debt was for eligible real estate
Documenting Proceeds Were Used To
Acquire Eligible Assets
cont.
– For equipment and fixtures with:
Copy of the security agreement for the debt being refinanced that shows that the original debt was for eligible equipment and fixtures
– For fixtures, this might be included in the real estate mortgage or deed of trust
Copy of filed UCC-1/UCC-3 financing statements and fixture filings
Documenting Proceeds Were Used To
Acquire Eligible Assets
cont.
What does not qualify as a lien instrument is:
– Purchase and sale contract – Settlement statement
– Business, Construction or other Loan
Agreement
– Commitment letter or letter of intent
– Promissory note – more about notes in a
moment
Documenting Proceeds Were Used To
Acquire Eligible Assets
cont.
Where the debt being refinanced was used for both eligible and ineligible purposes, provide evidence of what portion of the debt was for eligible 504 fixed assets and related costs
– Preferably this will be a statement or
disbursement sheet from the lender whose debt is being refinanced breaking down its use of proceeds into eligible and ineligible categories or a settlement statement
Don’t Forget
The Promissory Note(s)
Exhibit 24 also must include a copy(ies) of
the signed promissory note(s) evidencing the debt being refinanced
– The note(s) will show to whom the loan
was made so that CDC can verify that the existing debt was incurred for the benefit of the small business
Don’t Forget
The Promissory Note(s)
cont.
The entire history, i.e., the genealogy, of the debt being refinanced must be
provided!!
– For example, if the original note has been
refinanced previously or modified in some other way, then CDC must include not only the current note, but all prior notes and change in terms or modifications back to the original note
SLPC will examine all notes and change in terms in the debt‟s genealogy
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“Same Institution” Debt
“Same institution debt” is any debt of the CDC and/or
Third Party Lender who is financing the new Project, and/or affiliates of either
– Any debt can mean 504 Loans, 7(a) Loans or other loans made by CDC or Third Party Lender or an affiliate of either
“Same institution debt” may be refinanced, but only
SBA may approve the refinancing and not PCLP-CDCs
– This is to avoid any conflict of interest or appearance of a conflict of interest
“Same Institution” Debt
cont.
The lender(s) of the debt to be refinanced must agree to release the lien(s) on the 504 eligible assets so that the 504 Loan will have the 2nd lien position on those assets
It is recommended that a letter from the
lender(s) agreeing to release the lien(s) be included in Exhibit 24
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(2) Existing Debt Was Incurred For
The Small Business
The small business for which existing debt is refinanced must be the same small business for which any new Project costs are incurred
The existing debt may be owed by an
Operating Company or an Eligible Passive Company or both
The existing debt may consist of one or more loans
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(2) Existing Debt Was Incurred For
The Small Business
cont.
Both existing 504 Loans and 7(a) Loans are existing debt which may be refinanced
An existing 504 Loan may be refinanced if it meets all the requirements for debt
refinancing and whether the existing 504 Loan was made by the same or a different CDC
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(2) Existing Debt Was Incurred For
The Small Business
cont.
An existing 7(a) Loan may be refinanced in whole or in part only if:
– CDC provides verification that the current 7(a)
lender is unwilling or unable to modify the current payment schedule
For example, the current 7(a) lender cannot modify the current payment schedule because a secondary market investor will not agree to modified terms
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(2) Existing Debt Was Incurred For
The Small Business
cont.
– CDC does not have to get the current 7(a)
lender‟s consent to the debt refinancing; CDC just has to provide verification that the current 7(a)
lender is unable or unwilling to modify its current payment schedule
– There are various types of acceptable verification, including, but not limited to, a letter from the
current 7(a) lender that it will not modify or a copy of a letter or other written response from the 7(a) lender declining or refusing Borrower‟s request to modify
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(2) Existing Debt Was Incurred For
The Small Business
cont.
Question: In the current economy, many lenders who originated 7(a) loans are gone and it may be difficult to find the lender who now holds the 7(a) note or get verification that lender will not modify. How does the CDC proceed if the originating 7(a) lender is no longer in operation?
Answer: If the originating 7(a) lender is gone, SBA can identify whether SBA or another lender is the current holder of the 7(a) promissory note; CDC or Borrower must then follow up with that lender
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(2) Existing Debt Was Incurred For
The Small Business
cont.
If the Third Party Lender or a CDC affiliate is the 7(a) lender, then the 7(a) Loan is eligible for 504 debt refinancing only if the 7(a)
lender is unable to modify the existing terms because a secondary market investor will not agree to modified terms
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Seller Debt – Special Case
An existing Seller note may be refinanced
– Instruments resulting in transfer of ownership of the Property to the small business are
eligible for refinancing
– If the Seller is a private individual, then CDC will need to work with the Seller, prior to
application, to obtain a satisfactory note and transcript of account
– If a seller note does not exist, then the debt cannot be refinanced
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(3) Existing Debt Is Collateralized
By Fixed Assets
The 504-eligible fixed assets collateralizing the
existing debt to be refinanced must also collateralize the 504 Loan unless SBA [the SLPC] approves a
waiver due to extraordinary circumstances
– PCLP CDCs may not use their delegated authority to approve a 504 Loan requiring this waiver
– The lender of the existing debt must release, subordinate or assign its lien on the 504-eligible fixed assets so that Third Party Lender and/or SBA on the 504 Loan will have the same lien position on the collateral previously held by the lender whose debt is being refinanced
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(3) Existing Debt Is Collateralized
By Fixed Assets
cont.
If the assets securing the existing debt are at a different location than the Project Property, then separate appraisal and environmental reports are required if the appraisal and
environmental requirements of SOP 50-10(5) are applicable
– The SOP appraisal requirements apply to commercial real estate or equipment
– The SOP environmental requirements apply to commercial real estate
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(3) Existing Debt Is Collateralized
By Fixed Assets
cont.
In preparing the Authorization, the 504-eligible fixed assets collateralizing the existing debt are considered Project
collateral because the Refinanced Debt is a Project Cost
– Both the expansion property and any 504-eligible fixed assets securing the existing debt to be
refinanced, but at a different location, are in Part A. PROJECT TO BE FINANCED Paragraph 1. Project Property
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(4) Borrower Has Been Current On
The Existing Debt
Borrower must have been current on all payments due on the existing debt for not less than 1 year preceding the date of
refinancing (or for the time the existing debt has been open if less than 1 year)
– „‟Date of refinancing'' means the date that the 504
Loan is approved by SBA
– For a PCLP Loan, that is the date the 504 PCL Loan Number is issued
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(4) Borrower Has Been Current On
The Existing Debt
cont.
CDC must submit a transcript of account or similar documentation containing detailed
payment history from the lender whose debt is being refinanced reflecting that the existing
debt has been current
– For a 7(a) Loan or 504 Loan is being refinanced, a transcript of account from Colson Services Corp. can be used
(4) Borrower Has Been Current On
The Existing Debt
cont.
An acceptable transcript of account includes:
– Date payment is due
– Date payment is made/posted
– Amount of payment
– Remaining/current balance
– Original balance – Any late fees
(4) Borrower Has Been Current On
The Existing Debt
cont.
If late fees have been incurred, CDC must
confirm that no payments were more than 30 days past due
It is recommended that a letter from the
lender verifying that the debt has been paid as agreed be included in Exhibit 24
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(4) Borrower Has Been Current On
The Existing Debt
cont.
Any unremedied delinquency on the existing debt after 504 Loan approval must be reported to SBA as an adverse change
Typically the existing debt is refinanced with the interim financing and this occurs shortly after 504 Loan approval when the Interim Loan closes and funds
– Consequently, it then would be an unremedied adverse change on the Interim Loan
– CDC must delay closing and submitting the 504
Loan for debenture funding until that delinquency is remedied or CDC must cancel the Authorization
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(4) Borrower Has Been Current On
The Existing Debt
cont.
A loan on deferment is not considered current and is not eligible for refinancing
But if Borrower was on deferment and has been current for at least 1 year on the catch up plan, then the existing debt is eligible for refinancing
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(5) Refinancing Will Provide A
Substantial Benefit to Borrower
The refinancing must provide a substantial benefit to the applicant
“Substantial benefit'' means that the portion
of the new installment amount(s) on the Third Party Loan and 504 Loan attributable to the debt being refinanced must be at least 10% less than the existing installment amount(s)
– Exceptions can only be granted by SBA, not by PCLP-CDCs under delegated authority
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(5) Refinancing Will Provide A
Substantial Benefit to Borrower
cont.
– Prepayment penalties, financing fees and otherfinancing costs required by the existing debt
instruments may be added to the amount being refinanced to calculate the percentage reduction in the new installment amount(s)
– For a 7(a) Loan or 504 Loan is being refinanced, a prepayment estimate from Colson Services
Corp. may be used to establish the 10% reduction
– Refinancing a balloon payment is deemed to be a substantial benefit
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(5) Refinancing Will Provide A
Substantial Benefit to Borrower
cont.
The substantial benefit of at least 10% is calculated at the time of 504 Loan approval
In calculating the new installment amount(s) on the Third Party Loan and 504 Loan attributable to the debt being refinanced, CDC uses the interest rate committed on the Third Party Loan and projected on the 504 Loan
– If the Third Party Loan interest rate is based on an index or margin (e.g., Prime Rate), then CDC uses that index or margin at the time of
application
– For the 504 interest rate, CDC uses the most recent debenture funding rates
(5) Refinancing Will Provide A
Substantial Benefit to Borrower
cont.
Failure to include a “substantial benefit”
analysis in the application = screen out
It is strongly recommended that CDCs use the template provided by SLPC to calculate the “substantial benefit”
This can be found on the NADCO website and at http://www1.atwiki.com/504 loans/
– Go to drop down menu “Refinancing”
– See “Click Here to Download a Refinance
Worksheet”
Substantial Benefit Worksheet
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(6) Refinancing Will Provide Better
Terms Or Rate Of Interest
The refinancing under 504 will provide better terms or rate of interest than the existing debt on the date of refinancing
– Again “date of refinancing'' means the date
that the 504 Loan is approved by SBA
– For a PCLP Loan, that is the date the 504 PCL Loan Number is issued
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(6) Refinancing Will Provide Better
Terms Or Rate Of Interest
cont.
“Better terms or rate of interest” may include,
but are not limited to:
– Longer maturity, but always commensurate with the useful life of the fixed assets
– A lower interest rate committed on the Third Party Loan or projected on the 504 Loan
– Improved collateral conditions
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(7) Use Of 504 Loan Proceeds
The Project financing (Third Party Loan,
Interim Loan, 504 Loan and Borrower
contribution) can be used only for:
–
Refinancing eligible existing debt
–Costs of expansion relating to the
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(7) Use Of 504 Loan Proceeds
cont.
Costs essential to the refinancing, such as
prepayment penalties, financing fees or other refinancing costs required by the original
terms of the existing debt instrument, may be included in the debt refinance portion of 504 Project Costs
– Refinancing costs, however, do not have to be included
– Refinancing costs also do not mean the new Third Party Loan and new 504 Loan prepayment
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(8) Prohibited Refinance Debt
504 Loan proceeds cannot used to refinance debt owed to:
– An Associate of the 504 Loan applicant
– An SBIC
– Any creditor in a position to sustain a loss causing a shift to SBA of all or part of a potential loss from the existing debt
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(8) Prohibited Refinance Debt
cont.
A creditor in a position to sustain a loss would be any type of adverse condition involving the existing debt
that puts the small business at risk and possibly unable to continue to pay the debt
Examples include:
– Borrower has filed bankruptcy, but is paying the existing debt
– Borrower is current on the existing debt, but the business is no longer in operation
– The lender for the existing debt is aware that Borrower is in arrears on other loans with that lending institution
– The lender for the existing debt is aware of other adverse or deem-at-risk factors
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Project In or Outside of CDC’s
Area of Operations
Whether the new Project is within CDC‟s Area of
Operations is based on the assets newly acquired for the small business and not on assets securing the debt being refinanced
If the assets being refinanced or any collateral securing the existing debt are outside CDC‟s Area of Operations, CDC must establish that it is capable of closing and
servicing the 504 Loan and monitoring the collateral
– Non-PCLP CDCs must submit evidence to the SLPC for
approval that the CDC is capable of closing and servicing the 504 Loan and monitoring the collateral
– PCLP CDCs must document the file with evidence of their capability
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Borrower Equity Contribution
Equity in land and/or building – but not
equipment- that is being refinanced may be
included as Borrower‟s contribution as set forth under existing SBA policy
– This includes equity in the Project Property or in the other assets collateralizing the existing debt and now securing the 504 Loan
There is no change in how the Borrower‟s
contribution is calculated/confirmed for Projects with debt refinancing
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Excess Debt To Be Refinanced
If the existing debt to be refinanced was used for 504-eligible fixed assets and is existing debt on the Project Property (that is, already secured by the
Project Property), then that portion of the existing debt which does not exceed 50% of the cost of
expansion can be included in the 504 Project Costs and the excess can be consolidated into the Third Party Loan
– Debt refinancing does not change 13 C.F.R.
Section 120.922 on consolidation of pre-existing debt
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Excess Debt To Be Refinanced
cont.
Alternatively, and as long as the existing debt is debt on the Project Property, the Third
Party Lender can do all the debt refinancing as pre-existing consolidated debt
The concept behind adding debt refinancing to the 504 Project is that the Third Party
Lender, CDC and Borrower all contribute to the refinancing in the appropriate
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Excess Debt To Be Refinanced
cont.
If the existing debt to be refinanced is not existing debt on the expansion Project
Property, then only that portion of the existing debt that does not exceed 50% of the cost of expansion may be refinanced in the 504
Project
– The excess debt can be refinanced by the Third Party Lender or another lender, but only in a junior lien position to SBA on the fixed assets now
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Appraisals and Debt Refinancing
The appraisals on the Project Property and any assets at a different location must
support the Total Project Costs: the new
cost of expansion and the existing debt being refinanced
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Examples of Debt Refinancing
Let‟s look at some examples of 504 Loans
Q&A with SBA
Presenter: Zola Finch, Director of Finance Programs, RMI; NADCO Past Chair
Richard Jones, SLPC – 504 Finance Chief David Miller, SLPC – Senior Loan Officer Dennis Stytz, SLPC – Loan Officer
Mike Vanchiere, Mountain West Small Business Finance & NADCO Packaging Instructor
Mindy Murray, RMI, NADCO Packaging Instructor
Special Thanks
NADCO would like to thank the following
persons from SBA who assisted in preparing this Webinar:
Richard Jones, SLPC – 504 Finance Chief David Miller, SLPC – Senior Loan Officer Dennis Stytz, SLPC – Loan Officer
Conclusion
Thank you for your participation in this Webinar
If you have any additional questions on debt refinancing, please send them to
Please complete and submit your evaluation form promptly so that NADCO can forward your certificate of attendance
