Q: When I bought my building seven years ago, my bank gave me a $1 million mortgage based on an appraised value of $1.3 million. I have made regular payments, improved the building and run a successful business. We like this location and plan to stay.
Here’s the problem: My building’s latest appraisal came in at $900,000. I was surprised, but my banker seemed not to be. I owe a balance of $800,000 on my loan. This loan had a longer amortization and a shorter term, so it is up for renewal this year. I have never missed a payment and assumed this would not be a problem, but my banker indicated that the loan no longer is within their policy guidelines and that to get it renewed I may have to pay it down by another $80,000. I don’t have that kind of money.
I’m at a loss. What can I do?
A: It won’t soften the blow, but you might want to know that you are not alone. This is a tough problem because much commercial real estate has declined in value for several years through no fault of their owners.
Your banker is right: Most banks will not loan more than 80 percent of the value of commercial property. The balance of your loan is 88.9 percent of your building’s value. It was only 76.9 percent when you took out the loan and started making payments! You may be an excellent bank customer—it sounds as if you are—but the banker sees little room to be flexible. He may have other situations like yours in his portfolio.
Help is available though the U.S. Small Business Jobs Act, signed a few months ago by President Obama. The new law allows your bank to refinance existing real estate and equipment debt through the U.S. Small Business Administration 504 loan program.
The program was previously available only for the acquisition of new/used buildings and equipment. But this recent refinancing crisis has resulted in Congress and the president authorizing the SBA to open up this program to refinance real estate and equipment debt for a limited time.
Lenders offering the SBA 504 program have begun accepting applications for 504 refinancing loans. Eligible companies must be facing balloon payments or maturities before Dec. 31, 2012, and banks can take applications for the refinancing loans through Sept. 30, 2012. You fit comfortably in this schedule.
Borrowers will be able to refinance up to 90 percent of the current appraised property value or 100 percent of the outstanding mortgage, whichever is lower, plus eligible refinancing costs. Existing 504 projects and government-guaranteed loans are not eligible to be refinanced.
This is an opton that was not available until recently. Frankly, it’s a reality check that recognizes the state of the economy. I urge you to contact your banker and suggest he look into this new way to refinance your business mortgage. If your bank backs away for any reason, you should call another banker.•
Wojtowicz is president of Indianapolis-based Cambridge Capital Management Corp.