In the waning days of the Trump administration, Congress passed another round of federal relief. Many provisions of the $900 billion COVID-19 relief package were aimed at helping small businesses. The legislation also included several temporary enhancements to one of the more effective loan programs from the U.S. Small Business Administration (SBA): the CDC/504 loan.
These government-backed loans have played a crucial role in helping small businesses recover during the health crisis. The program offers affordable commercial mortgages with a downpayment of as little as 10% and historically low interest rates that are fixed for up to 25 years.
In today’s economy, small businesses need capital and stability. The recently passed legislation has made it even more attractive to refinance into a low-interest, high-leverage CDC/504 loan, which also can generate cash for your client’s business.
These government-backed loans have played a crucial role in helping small businesses recover during the health crisis.
Although the SBA was still finalizing the official guidelines this past February, the agency’s 504 purchase and refinance programs qualify for enhancement. These include temporary fee reductions and an extension of federally authorized payment subsidies for new 504 borrowers.
The legislation appropriated $3.5 billion to extend the small-business debt-relief program established by the original Coronavirus Aid, Relief and Economic Security (CARES) Act. For new CDC/504 loans approved by Sept. 30, 2021, borrowers will receive three months of payment subsidies, capped at $9,000 per loan per month. Borrowers with loans that have monthly payments above $9,000 can either wire the remainder or negotiate a repayment agreement with their certified development company (CDC).
Fees will be reduced for all new 504 loans approved between Dec. 27, 2020 and Sept. 30, 2021. This waives the third-party lender-participation fee of 0.5% charged on a bank’s first-position loan. It also waives the CDC processing fee of 1.5%.
As for the CDC/504 refinance loan, there are more lenient eligibility guidelines and flexibilities in refinancing government-guaranteed debt. The recent legislation reduces the required time that qualified debt must be in place for refinance eligibility from two years to six months. In addition, the borrower will not be required to have 12 months of current payments on an existing loan. Eligibility is to be reviewed on a case-by-case basis as part of the credit decision.
Purpose and structure
CDC/504 loans can be used for a number of different purposes, such as the acquisition of existing buildings or land, the purchase of machinery or property modernization. The loan proceeds can’t be used for working capital or to purchase inventory, but a business owner can refinance into a CDC/504 loan and cash out a percentage of the equity in the property, thereby indirectly generating cash for working capital and other purposes.
The loans have a unique structure, consisting of a traditional bank loan of up to 50%, an SBA loan obtained through a local CDC of up to 40% and a 10% equity contribution from the borrower. Startup businesses and single-purpose facilities have traditionally required a slightly higher equity contribution of 15%.
This structure serves two purposes. First, the relatively low equity contribution helps the small-business owner conserve operating capital. Second, the bank takes on relatively little risk, which makes them more likely to lend to a greater range of small businesses at reasonable rates. In addition to the standard purchase loan, the program is a good option for clients looking to get out of high-interest loans or ones with variable rates, short terms and balloon payments.
The refinance program allows small-business owners to cash out equity in their properties. They can refinance existing mortgage debt with combined financing up to 90% of the property’s appraised value. In addition, business owners can obtain up to 20% of their appraised property’s value in cash. These funds can be used for business expenses — including salaries, rent, utilities and inventory — which may be just what your clients need to survive this pandemic.
It is even possible for your clients to refinance into a CDC/504 loan without any downpayment. For example, say your client has $1.4 million in outstanding conventional debt on a building and needs $200,000 cash for business needs. If the property appraises for $2 million, it would be possible to do a cash-out refinance to obtain the needed funds with no equity infusion. By using a 25-year loan with a fixed, below-market rate, your client can enjoy monthly savings and increased cash flow.
Some of the nuances of the program can be tricky, however, and it is best to reach out to a local CDC during the initial stages of putting a package together. A CDC is a nonprofit corporation built to support economic development within its community through the CDC/504 loan program. They are regulated by the SBA and strive to be the advocate for the small business and mortgage broker throughout the life of the loan. Experienced CDCs can help you market properties and explain the details of the new legislation to potential clients.
This year is the perfect time for you to expand your offerings and inform small-business borrowers about the improvements to the CDC/504 loan program. But it also is worth emphasizing that, as of this past February, the CDC/504 refinance program was still under review and had not finalized its revised regulations, notices and forms. The SBA is expected to provide more information soon. Contact your local CDC for the most up-to-date information regarding the CARES Act relief. ●