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Refinancing Medical Real Estate Through the SBA

You may or may not be privy to the changes that were made to U.S. Small Business Administration (SBA) loan programs with the passage of the Small Business Jobs and Credit Act late last year. 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 has provides tremendous support to physicians who own their commercial property.

By refinancing your commercial mortgage with a 504 loan, you may be able to 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 a well kept secret in commercial property financing, but because it offers the highest cash-on-cash return financing available, as well as below-market, long-term fixed interest rates and longer amortizations, it is essential to for any physician to understand.

As most have become familiar with the new medical landscape that grips most corners in the city of Houston, tremendous growth is also occurring in physician ownership.  Simply, the strategy allowed doctors to turn a monthly lease payment into a mortgage payment which builds equity, and creates wealth.  From the physician’s perspective, these decisions made practical business sense at the time, and most likely, because of the availability of capital, most physicians found it easy to obtaina loan from a commercial bank to finance the project.

Present Day: Similar to so many doctors that we speak to, most are facing a ballooning note payment. If the ability to refinance and take advantage of lower interest rates was available through your bank, the situation would become much more manageable. The difficulty is that it’s tough to find a bank that will do a conventional refinance these days, even for physicians. Today’s tighter underwriting standards have made it increasingly more difficult for borrowers to qualify.

The scenario, to which I have just described may not exactly describe your situation, but if you’ve purchased commercial property in the past 10 years, it is likely that I am not far off. The good news is that the Small Business Administration is providing 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 you’re struggling with a tough economy, declining reimbursements or insurance providers.


In January, the SBA announced specific guidelines to determine who qualifies for 504 refinancing. To find out if you’re 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?

5) Was the debt to be refinanced substantially (85% or more) used for eligible 504 purposes originally (owner-occupied 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 necessary step for you and you should consider speaking with a SBA specialized lender immediately.

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 SBA’s other flagship loan program, which has allowed refinancing for some time.

From the taxpayer’s perspective, 504 refinancing is a better deal, and you benefit as well. The 7(a) is mostly a floating-rate loan program, which isn’t the best option for long-term, 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 doesn’t apply here. Small businesses historically create the lion’s 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.

Also…There is one other thing you should know, something that’s an indirect benefit to you. This refinance provision also helps banks. It’s 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 you’ve purchased commercial property for your practice from 2004-2008, you should consider refinancing with an SBA 504 loan.  Even if you have not purchased property, you are most likely aware of someone that has.  Please, do them a favor and forward this article along as this opportunity may not be around for a while, especially at today’s interest rates and limited equity necessary to qualify.

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