March 15, 2021
Main Street Monday – New SBA 504 Refinancing Rules Allow Borrowers to Maximize their CRE Equity Withdrawals
The Economic Aid Act temporarily gives Certified Development Companies (CDCs) unilateral authority to refinance the first lien on an existing 504 Project. Also known as the “Third Party Loan,” the first and second lien combination allows lenders to structure a loan product that is profitable for their institution while also maximizing their borrower’s commercial real estate (CRE) equity withdrawals.
According to an SBA Prodceedural Notice issued late last month, from December 27, 2020, to December 26, 2021, CDCs may refinance existing 504 loan projects in an amount that, when combined with the outstanding balance on the subordinate 504 loan, is not more than 90% of the total loan value.
However, the authority of a CDC to unilaterally allow the refinancing of a Third Party Loan may only be exercised under the following conditions:
- The CDC must retain in its loan file the Third Party Lender’s Appraisal which evidences that the loan has not been refinanced for more than 90% of the total loan value;
- The CDC must set out the terms of the transaction in a properly executed Subordination Agreement;
- The CDC must properly record a Third Party Lender Agreement between the CDC and the Third Party Lender;
- The CDC must use appropriate counsel when drafting, reviewing, and recording the Subordination Agreement, Third Party Lender Agreement, Power of Attorney, and any other necessary documents related to the refinancing of the Third Party Loan;
- All other conditions set forth in SOP 50 55 related to the subordination of the 504 Loan to the new Third Party Loan continue to apply; and
- Any refinancing of a Third Party Loan is subject to review by SBA’s Office of Credit Risk Management.
To learn more about building a profitable and well-performing CRE loan portfolio by taking advantage of the SBA’s temporary 405 refinancing rules, sign up for Coleman’s webinar “The New SBA 504 Refi Loan!” which will be held on Wednesday, March 17, 2021, at 2:00 pm Eastern.