Barbara Morrison is founder and president of TMC Financing, a certified development company (CDC) that has
provided real estate financing in California and Nevada for more than 30 years. TMC offers commercial real estate buyers up
to 90 percent financing by utilizing the U.S. Small Business Administration’s CDC/504 loan program. TMC is the top-ranked
CDC in northern California and has been among the nation’s top five CDCs for the past two decades, providing more than
$9 billion in financing for more than 5,000 businesses. Reach Morrison at (415) 989-8855 or email@example.com.
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nitially introduced as a pilot program under
the Small Business Jobs Act of 2010, the 504 refinancing program expired in September 2012.
The SBA, small-business owners and lenders
fought to bring it back, and it was permanently reinstated in May 2016.
This gave business owners an additional way to free
up equity in their properties and reduce their monthly loan payments. It also allowed mortgage brokers to
bring owner-occupied commercial real estate deals
back into a bank’s comfort zone.
The 504 refinancing program allows small-business
owners to refinance commercial real estate with a
loan-to-value (LTV) ratio of up to 90 percent. In addition, the transaction can include cash out totaling up
to 20 percent of the appraised value of the assets. For
cash-out projects, the maximum LTV is 85 percent.
Benefits and structure
It’s clear that small-business owners can reap the rewards of the 504 refinance, but they aren’t the only
party to profit. The benefits to a commercial mortgage
■ Generating more business, either from new or
■ Minimizing risk to the first-mortgage lender by
limiting their capital infusion to 50 percent of the
■ Generating new fee income for the first-position
lender through a quality portfolio loan;
■ Unlocking a client’s trapped capital and reducing
their downpayment requirement to as little as
10 percent, and;
■ Simplifying the loan process, both for the broker
and the borrower, by partnering with a CDC.
The SBA’s regulations for the 504 refinance program
allow loans to be structured like a traditional CDC/504
purchase loan, comprised of a first and second lien. A
conventional lender provides up to 50 percent of the
total project cost and holds the first lien position.
The SBA authorizes a CDC, which is a nonprofit organization, to provide financing for up to 40 percent of
the project’s cost and to take a secondary lien position.
The borrower contribution must be at least 10 per-
cent of the project’s appraised value, a requirement
most often satisfied through the borrower’s equity
in the collateral. The participating bank loan and the
CDC/504 loan can be in equal amounts, but the CDC’s
contribution can never be greater than the bank loan.
There are essentially no restrictions on the bank’s
loan in regards to structure or terms. The bank uses its
own underwriting standards and sets its own terms,
rates and fees. The bank loan, however, must include
at least a 10-year term for commercial real estate or
seven years for an equipment loan.
Eligibility and requirements
The eligibility requirements are the same for the
CDC/504 refinance as they are for the CDC/504 purchase loan. To be eligible, a business must operate for
profit and occupy at least 51 percent of the building’s
total square footage at the time the application is submitted to the SBA.
Eligible size standards vary widely and depend
on the business in question. About 25 percent of all
manufacturing businesses, for example, have up to
500 employees and are eligible. Alternate standards
include a $15 million cap in a borrower’s tangible net
worth and after-tax net income of less than $5 million for the past two years.
In addition to these requirements, there are some
specific rules within the 504 refinance program that
mortgage brokers should know about. First, one or
more commercial loans can be refinanced, but no existing loans through the SBA, U.S. Department of Agriculture (USDA) or other government programs are eligible.
The loans to be refinanced must be at least two years
old, and the borrower must be able to prove, using financial statements, that they owned and operated the
business for the entire two-year period. If ownership
has changed hands within the past two years, the SBA
considers the business “new” and will require a larger
downpayment. The loans also must be current, meaning no payments were more than 30 days overdue during the past 12 months.
Lastly, the maximum refinance LTV is 90 percent of
the pledged collateral for existing mortgages and debt.
The maximum LTV drops to 85 percent of the collateral when business expenses are included on top of
the debt refinance. Eligible business expenses include
— but are not limited to — salaries, rent, utility payments and inventory. The financing request also may
include funds for eligible business expenses that were
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“It’s clear that
owners can reap
of the 504
they aren’t the
only party to