business

Special to the Star Tribune

Although not usually thought of in the same way, many small businesses are in the same boat as homeowners facing foreclosure. Like the homeowners, they bought real estate at the top of the bubble-inflated market four or five years ago, and now, with the price bubble burst, find themselves "underwater" with their mortgages.

Commercial property values, much like homes, have tumbled, and so these small businesses find they owe more on their owner-occupied buildings than they're worth. Many types of commercial mortgages mature in only five years, so banks and borrowers alike are facing a huge problem as the bill for the spree of leveraged buying that happened in pre-recession times comes due.

Traditionally, borrowers refinanced the mortgage debt. But with property values in the tank and banks tightening lending standards, a massive wave of foreclosures and write-downs on commercial property appears to be in the offing, according to some analysts.

The Oakland, Calif.-based research firm Foresight Analytics forecast 49 percent of commercial mortgages maturing in 2011 will be "underwater" -- with negative equity -- with a whopping 63 percent of those maturing in 2012 also in that category. In all, it said, some $770 billion in commercial loans with balances greater than their collateral value will come due in the next few years.

Congress and the White House are offering help to small businesses underwater on mortgages for owner-occupied buildings. With passage of the Small Business Jobs and Credit Act of 2010 in September, significant changes were made to the lending programs offered by the U.S. Small Business Administration to help cope with the situation.

Tweaks to the SBA's 504 and 7 (a) loan programs are designed as an economic stimulus to strengthen community banks and help them pick up the slack in commercial lending.

The law's provisions increase SBA loan limits, temporarily extend government guarantees and reduce fees in a bid to encourage lending to creditworthy small businesses in need of capital to start, expand and grow their businesses.

But in terms of commercial real estate, perhaps the most important provision is a change to the SBA's 504 Certified Development Company loans, which are used to finance the purchase of real estate and other fixed assets. Under the change, small business owners will now for the first time be able to use the low-interest, government-backed loans to refinance existing commercial mortgages.

This is how it would work: The SBA's network of lenders, already helping small businesses finance long-term investments like real estate and heavy equipment, would be able to refinance their customers' existing mortgages with the same structure now applicable only for new loans -- a 50 percent private first mortgage combined with a 40 percent SBA-backed debenture and 10 percent borrower equity.

The regulations on how the new provisions will work have yet to be spelled out, and so participating community banks are still in waiting mode, but they expect it will provide a financial lifeline to small businesses facing foreclosure, said Kim Storey, SBA lending manager at Highland Bank in Burnsville.

"The exact requirements have not been established yet, but we're thinking that by the end of the year, we'll know what the parameters are," she said. "Then, for the next two years, a bank will be able to refinance those properties under the 504 programs. Refinances were never eligible before."

Storey predicted demand for the loans will be "explosive" when guidelines are finalized and that banks will be happy to issue them because they address the needs of both the lenders and the borrowers in these tough times.

"It will really take a lot of pressure off both the banks and the borrowers, who will be able to refinance their properties into longer-term mortgages with 20-year notes," she said. "The banks like it because it gives them a 50 percent loan-to-value ratio rather than a 90 percent LTV, and borrowers get the peace of mind that they have a long-term solution."

Minnesota businesses have been among the nation's heaviest users of SBA lending programs, and the changes provided for in the Small Business Jobs and Credit Act will only further cement that status, predicted Marshall McKay, president and CEO of the Independent Community Bankers of Minnesota.

"Minnesota in 2009 led the nation in its use of SBA loans, and the Minneapolis SBA district office was ranked No. 1 in the number of loan guarantees," he noted. "What it says is that Minnesota's community lenders 'get it.' They know how to use SBA loans to help their customers, and the fact they now have additional criteria to do refinancings makes it an even more powerful tool."

The SBA-guaranteed loans represent a "flight to quality" in the lending market, which is part of the reason why McKay says 2011 will be another big year for the programs in the state.

Don Jacobson is a St. Paul-based freelance writer.