SBA 504 Debt Refinance With Expansion! How To Guide

sba sba 504 sba loans May 08, 2024

It is going to be tough finding qualified borrowers in 2024 & 2025! The good news is that your next SBA 504 loan could very well be your existing client! For a variety of reasons, business owners may decide to expand their existing commercial property rather than buying a new location. Your mission, if you choose to accept it, is to mine your client base and find existing clients who want to expand their existing facilities.

If your existing clients are considering expanding their current facilities, they may not be aware that they can refinance their existing CRE loans or existing SBA 504 loans to finance the expansion. As a result, they may table or pull the plug on the expansion project because they might wrongfully believe that they can’t access the capital or that the cash injection would be too high. This is where you come in and become their hero! You can show them how it is possible to refinance their existing debt and get them the capital for the expansion as well!

Below is a scenario of how the SBA 504 refinance with expansion works. In this case, the business owner wants to finance an expansion (of the existing building) that will cost $2,000,000 (New Costs). The appraised as-is value of the existing building is $3,000,000, and the building has existing debt of $2,500,000. The SBA SOP states that existing debt must not exceed 100% of the new expansion costs. Does this blow up the deal? No! Let’s keep going to see how it still works!

The left side of the table (Use of Funds) is used to structure the new SBA 504 loan. Notice that the “Existing Debt” row shows an amount of $2,000,000. We had to adjust the existing debt so that it did not exceed 100% of the “New Costs” which is $2,000,000. The Existing Equity of $500,000 is simply the as-is value of $3,000,000 less the existing debt of $2,500,000. The other line items in the Use of Funds section of the table are the SBA eligible expansion costs. We have $4,500,000 in total Use of Funds which becomes the total cost of the new project.

The right side of the table (Source of Funds) is used to structure the new SBA 504 loan as well. We use the Use of Funds total $4,500,000 (aka the total cost of the new project) to determine the structure of the new SBA 504 loan. Based on the Existing Equity of $500,000, which is 11% of $4,500,000, we derive the LTV of the Bank 1st (aka Third Party Loan) at 49% loan-to-cost. The SBA 504 2nd is at 40% loan-to-cost of the total project.

This is how we calculate the maximum allowed SBA 504 2nd on a refinance with expansion project. The question you are probably asking yourself is: “What will happen to the $500,000 in existing debt that was not included in the table below. Does the borrower have to use cash to pay the existing $2,500,000 loan down to $2,000,000? The great news is that the SBA allows for the extra $500,000 to be added to the new Bank 1st (aka Third Party Loan) for a total Bank 1st of $2,700,000. The final new SBA 504 structure is a bank 1st of $2,700,000 and a SBA 2nd of $1,800,000. If you have not realized it yet, the borrower doesn’t need to put additional cash into the project!

There are many different permutations of the scenarios that fall under the SBA Refinance With Expansion program including cash out scenarios. If you have additional questions about how you can leverage the SBA 504 With Expansion program to hit your loan production goals in 2024 and build your pipeline for 2025, you can call me at 310-210-4571 or email me at [email protected].

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