Well, we’ve kicked off the Holiday Season. I’ve eaten my turkey sandwich and gobbled up the last of the pumpkin pie. Time to work. Over the past few weeks, you’ve served up huge portions of questions about 504 debt refinance, with or without expansion. OK. Enough. Moving on. We knew 504 refi would be a popular product when CDCs started marketing .it. But now today’s low interest rates are causing a boom in the market that has left some CDCs unprepared.
You know the basics. The borrower must have been in operation for all of the 2-year period before the application; debt has to be at least two years old; at least 85% of the proceeds of the original loan had to have been used for 504 eligible use. From that point, there’s confusion.
So let me clarify things using our good old example: a $1 million loan request to refi a conventional commercial loan.
50-40-10? Forgeddabout it. Our industry has done a good job drumming the 50-40-10 structure into every lender’s mind. Try this: Wake up a CDC person in the middle of the night and ask them to tell you about the 504 loan program. Guaranteed: Within two sentences they’ll mention 50-40-10 at least three times. But we don’t use 50-40-10 when we’re talking about refi. In fact, regarding 504 refi, “Forget about 50-40-10!”
A Different Approach. 504 Debt Refi without expansion is the only time you use LTV to structure the financing. When using the 504 Debt Refinance Program, the Total Project Cost must equal the Fair Market Value of the project assets. We won’t know the Market Value until we get an appraisal and nobody is going to pay several thousand bucks for an appraisal without knowing the loan amount.
We have to make some assumptions: The net 504 loan amount cannot exceed 40% of the financing. That’s a given. And the 504 refi amount cannot exceed the amount of the TPL, but it can equal the TPL.
Now let’s come up with $1 million. We can split it $500,000 for the TPL and $500,000 net debenture. Since the 504 refi cannot exceed 40% of value, the appraised value has to be no less than $500,000/40% = $1,250,000. We get this structure:
- TPL: $500,00
- 504 net: $500,000
- Equity: $250,000
That’s just the minimum financing structure. If you change Total Project Costs to the value of the real estate, it’s not going to change your financing.
What about the borrower’s contribution? The borrower already owns the real estate and its contribution is the equity it already has.
Just Desserts. Did you see what just happened? You offered your prospect a 25-year fully amortized loan at today’s historically low interest rate for absolutely nothing down!
Senior Associate, CDC/504 Loan Program
REMINDER: Tune in to our 2nd 504 Webinar Ask the Experts! ∙Thurs., Dec. 10 ∙1 p.m. Eastern ∙10 a.m. Pacific. Keep those questions coming!