When I took the family to see Disney’s “Encanto” awhile back, my ears perked up when the word, “Bruno” came off the screen. And hairs on the back of my neck stood on end when the characters sang, “We don’t talk about Bruno, no, no, no.” Yikes. Here’s a happy tale, one where Loan Officer Louie sings, “We talk about Bruno. J.R. Bruno. Yes, yes, yes!”

I’m always in for a challenge when I hear from Louie the Loan Officer. He called the other day. Maestro, some magic please:

LOUIE. Richard I’ve got one of those 504 refi requests that are always so tricky, Got time while I run something past you?”

ME. Sure! In today’s interest rate environment it’s best not to dawdle when faced with a 504 refi.

LOUIE. Here’s the deal: Guy owns a restaurant/catering company. We financed his current location and he’s been a good customer. His business survived the pandemic but another business in the same town closed. Guy wants to buy that location and open it as his second location. At the same time, he wants to refi the loan on his existing building. The equity in his existing building will be the required contribution. Then, he’ll have just one 504 loan covering both properties and won’t have to put in additional cash.

ME. Because the project involves refinancing as well as purchasing a new property, it’s a Debt Refi with Expansion. I already had SOP 50 10 6 open to page 469, “Permissible Debt Refinancing with Expansion.” I know the page number by heart because I remember: “Refi’s fine, page four-six-nine.” I walked Louie through the requirements:

“So the loan you’ll be refinancing:  Was its original purpose to buy land and build on it, or another 504-eligible cost?”

LOUIE. Yes! Well to be clear: Originally the seller carried the financing. But when Big Ole Bank made the loan to buy the new property, it also paid off the seller-carry on the old property. And yes, the purpose of the sell-carry loan was originally for eligible project costs.

ME. Hmm. So Big Ole Bank had already refinanced the loan before the 504 application. Louie, I hate to tell you, but refinancing isn’t an expense that can be paid for in advance of the application. The note to be refinanced, the seller carry note, has already been paid with funds related to the purchase of the project real estate. There’s no longer a refinance aspect to this project.

LOUIE. Huh what?

ME. Okay. The loan proceeds would not be paying off a loan originally used to purchase the real estate. The loan you are paying off was originally used to refinance the seller-carry note. That’s the first issue.

But wait! It gets worse. As you know, the equity in the project is the appraised value of the current property less the debt against it. When Big Ole Bank refinanced that debt, the amount of the debt changed. Equity is calculated using the current debt, not the amount of the debt before the bank refi. In short, Big Ole Bank’s loan wiped out the equity in the project.

LOUIE. Oh no! I’m doomed. Abandon all hope!

ME. Not quite, Louie. Remember: “While I breathe, I hope.” First, have Big Ole Bank split its loan into two loans: one for the new property and one for the old property. Make sure that both loans are short term in nature. Then submit an application for permanent financing, TPL and 504, for the new property. Wait six months after the loan split, and then do a Debt Refi without Expansion of Big Ole Bank’s loan on the older property.

Then tell Big Ole Bank that you know where they can get training on 504 loans. I’m sure they’ll be interested.

LOUIE. Thank you, Richard at J.R. Bruno, yes, yes, yes!

Richard Jeffrey
Senior Associate, CDC/504 Program
Head Underwriter