MARCH 2011 CENTRAL FLORIDA EDITION

SBA 504 Refinancing: A Groundbreaking Opportunity

By Chris Hurn, CEO/Cofounder, Mercantile Capital Corporation

You may or may not know that several changes were made to U.S. Small Business Administration (SBA) loan programs this past September with the passage of the Small Business Jobs and Credit Act. One of the most-significant changes is the two-year provision that allows small-business owners to use SBA 504 loans to refinance commercial real estate and other eligible fixed assets, and this has huge ramifications for physicians who own their commercial property. By refinancing your commercial mortgage with a 504 loan, you can tap the embedded equity in your commercial property, as well as take advantage of historically low interest rates. The SBA 504 loan program may be the best-kept secret in commercial property financing because it offers the highest cash-on-cash return financing available, as well as below-market, long-term fixed interest rates and longer amortizations. The opportunity to use these loans for refinancing is a great one for doctors and other medical professionals, and should be acted upon immediately.

refinance and take advantage of low interest rates, your situation would become much more manageable. The only problem is that its tough to find a bank that will do a conventional refinance these days, even for physicians. Todays tighter underwriting standards have made it increasingly difficult for borrowers like you and other doctors to qualify with most banks. The scenario Ive just laid out may not describe your situation exactly, but if youve purchased commercial property in the past 10 years, Im probably not very far off. The good news is that the SBA is giving you a second chance by allowing refinancing with 504 loans of up to 90 percent loan-to-value and up to 125-percent with additional collateral pledged. This is a major benefit for medical practices, whether youre struggling with the tough economy or not.

FIVE QUESTIONS FOR ELIGIBILITY

In January, the SBA announced specific guidelines to determine who qualifies for 504 refinancing. To find out if youre eligible, answer the following five questions: 1) Does your note to be refinanced have a maturity date on or before 12/31/2012? 2) Has your debt been outstanding for at least two years? 3) Has your practice been in operation for at least two years? 4) Have you been current (no payment deferrals or past dues of more than 30 days) on your note for the past 12 months?

A SECOND CHANCE
A large number of physicians bought the commercial property their practices occupy in recent years. If you were one of them, then you made a great decision. Doing this allowed you to turn a monthly lease payment into a mortgage payment which actually builds equity and ultimately creates wealth. The decision made great business sense, and you probably got a conventional loan from your commercial bank to finance your project. Fast-forward to the present: just like so many other doctors, youre facing a ballooning note payment. If you could

5) Was the debt to be refinanced substantially (85% or more) used for eligible 504 purposes originally (owneroccupied commercial real estate, heavy machinery, equipment, and closing costs related to the project)? If you can answer Yes to all of the above questions, then SBA 504 refinancing is a strong possibility for you and you ought to contact a 504 specialist lender right away. Also, the SBA is accepting applications as of 2/28/11 (the day Im composing this article), so this program ought to be in full swing by the time you read this.

THE PERFECT TOOL

In addition to its beneficial terms for physicans, the SBA 504 program is a zero-subsidy program. In other words, it does not cost taxpayers anything. Program fees have carried it for years without any federal subsidy, and the program has run such a surplus at times that the government redirected some of these funds for entitlement spending a few years ago. In addition, the loan-loss rate is historically about one-third that of the 7(a) program the SBAs other flagship loan program, which has allowed refinancing for some time. From the taxpayers perspective, 504 refinancing is a better deal, and you benefit as well. The 7(a) is mostly a floatingrate loan program which isnt the best option for longterm, hard assets like commercial property and often requires additional collateral. This additional collateral often takes the form of a second lien on your home or liens against inventory and receivables. This ties up those assets and can ultimately be problematic if you later need a line of credit or other short-term financing. By making 504 refinancing possible, the SBA is doing a world of good for many small medical practices. Some critics will argue that this provision will only cause business-owners to use their commercial real estate like an ATM, much like homeowners did in the recent credit boom. But that analogy doesnt apply here. Small businesses historically create the lions share of jobs in the U.S. Many small-business owners have cut expenses and have leveraged up to stay in business during an economically difficult period. In addition, entrepreneurial physicians like you typically make decisions to maximize profits and grow your business not to spend recklessly.

an indirect benefit to you. This refinance provision also helps banks. Its no secret that banks are being forced by their regulators to increase their capital, lower their risks and generally strengthen their balance sheets. In many cases, that means reducing their exposure to commercial real estate. If you approach your bank to refinance your commercial mortgage into a 504 loan, you might just be doing your banker a huge favor. And working with a lender who specializes in 504 lending without requiring any change in your banking relationship will lessen any perceived threat in this situation. If youve purchased commercial property for your practice at least two years ago, you ought to look into refinancing now with an SBA 504 loan. Even if you havent purchased property, you probably know someone who has. Pass this article along to them because this opportunity just might make their year.
Chris Hurn is Chief Executive Officer/Cofounder of Mercantile Capital Corporation, based in Altamonte Springs, Florida. His company focuses exclusively on providing SBA 504 loans (aka SmartChoice Commercial Loans) for small business owners who want to acquire and/or construct their own commercial facilities. He was recently awarded the SBAs Financial Services Champion of the Year Award for the second time in just four years. You can contact him at 407-786-5040 or email him at ChrisHurn@MercantileCC. com. For more information about Mercantile Capital Corporation, be sure to visit www.504Experts.com, www.504blog.com and www. SBA504LoanRefi.com.

LARGER IMPLICATIONS
Theres one other thing you should know, something thats