Tip of the Week
Refinancing a 504 project with a 7(a) Loan - Doable?
A surprising line of questions that keep coming up lately involves the rules surrounding taking out a 504 project (third party lender's loan and the CDC 504 loan) with a 7(a) loan. You would think it is pretty straight forward rule as depicted in 13 CFR 120.920(b), where it states "the third party financing for an existing 504 project cannot be refinanced with a 7(a) loan". Straight forward, right? Well, not necessarily.
Recently, while visiting with a lender client, the issue seemed to become muddled because the situation was not to use the 7(a) loan to JUST take out the third party (first lien lender) loan. The 7(a) loan was to be used to refinance BOTH the third party loan AND the CDC 504 loan, thereby eliminating the SBA guaranty on the 504 portion. The guaranty goes away, so there wouldn't have been a 7(a) loan in a first position and a 504 loan in second position (or two SBA guaranties on the same project), which is the big "no-no". Remember, if only the 3rd party lender loan is to be refinanced by the 7(a) loan, it would not be permitted by SBA. However, what about when both loans in an overall 504 project are refinanced? Can a lender do it, then?
We consulted SBA to get the correct interpretation of what is allowable. On its face, it seems that a lender could do just that - convert a 504 total project into a 7(a) loan (whereby the 7(a) loan is the only SBA guaranty in place). A really good discussion was had by SBA internally (at the non-PLP center, the PLP center, a district office and Headquarters in DC). At the end of the day, they were all in agreement....but like with most convoluted issues, the discussion had to come full circle before a solid interpretation of SBA regulation could be defined. Think about SBA refinancing rules overall, in that you cannot just focus on one piece of the puzzle. What are the other pieces of the refinancing puzzle?
Remember, when refinancing any loan in the SBA world, the lender must first determine that the loan being refinanced is on "unreasonable terms". Since the 504 project overall (both loans) were most likely already on reasonable terms, there wouldn't have been the justification needed to use a 7(a) loan to take out the project (either loan). Isn't 504 financing, by definition, on reasonable terms?
Here are a few lines in the SOP 50 10 5 B that must be taken into consideration:
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Does the lender believe that the debt no longer meets the need of the small business applicant?
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Will the new installment amount be at least 10% less than the existing installment amount?
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Is the debt being refinanced currently on reasonable terms?
The lender must make a SOLID case that the loans (the third party loan and the CDC loan) are not on reasonable terms - which will probably be difficult since it is a 504 project. Catch 22?
It would probably be a rare instance when this is a doable deal - to refinance both loans in a 504 project with a 7(a) loan. If you DO decide to proceed, we advise that you submit the loan applications to the non-PLP processing center for written approval.
This was one of those "hair bending" exercises where you have to step back, perhaps scratch your head and ask: what was the intent of the regulation in the first place? If you believe in the "soul" of SBA as we do - that there is a good purpose and positive essence behind the life of SBA lending. In the end, while some things don't always seem logical, there usually is a proper explanation. Sometimes you have to know how to ask the question to get the right answer.
We provide guidance on these types of issues in several types of "venues", such as our Lifeline relationships with our clients, on-site consultation when developing policy and procedures and specific loan file review - just to name a few. We stand ready to assist you in your daily effort to deal with SBA regulations. Call us for a free telephone consultation to determine how we may best address your needs. And in the meantime, all best wishes for a happy, healthy and prosperous New Year!
Take the Right Approach.
Karen McHugh and Brian Burke
SBA Access ©2009 - All Rights Reserved
All content is copyrighted and unauthorized use is strictly prohibited. If you would like to quote any part of this text, email bburke@sbaaccess.com or kmchugh@sbaaccess.com for permission.
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