BlumShapiro Helps Auto Dealer Find Innovative Financing Solution
An automobile dealership wanted to refinance its $4 million mortgage but, after experiencing a challenging year in 2009, many banks were unwilling to provide dealerships in such a risky business with conventional mortgages.
In addition, preliminary checks with the Small Business Administration had not proved promising. The SBA's most popular loan programs are the 7(a) and the 504. The 7(a) program offers mortgages on original owner-occupied real estate purchases up to $5 million but, since our client was refinancing, the only option was a 504 program loan.
That loan program can be used to refinance existing debt, but it guarantees $1.5 million of a maximum $2 million loan. At first glance our client had reached another dead end as this did not meet their $4 million mortgage requirement.
The client, already familiar with BlumShapiro's reputation and extensive network, called our office seeking advice. We quickly assembled a team with broad-ranging financial expertise that suggested a series of creative solutions to the client's dilemma.
In short order we were able to help the client find a financial partner that could offer the client a "Pari passu" loan. Pari Passu is Latin for "equal rate" and it represents a loan arrangement that many banks and lenders may not be familiar with, but can open the door for hard-to-find favorable mortgages.
Under a pari passu arrangement between banks and the SBA, the SBA assumes a maximum risk of $1.5 million of the first $2 million of the mortgage under the 504 program. The bank then assumes the remainder of the risk and, while both parties have a first lien position on the property, the bank's mortgage is not in a second position to the SBA.
In this scenario, the bank mitigates almost half of its risk, making the mortgage more attractive from a risk-tolerance point of view. With the elimination of the SBA fees, this type of mortgage became even more attractive to our client from a cost perspective.
The pari passu option is not often discussed in banking and SBA circles, but the BlumShapiro team executed an intensive search of lenders, quickly finding one who was experienced with these types of transactions and willing to assemble a favorable loan package for our client. In conjunction with this effort, numerous banking institutions were also familiarized with pari passu for possible future initiatives.
All banks are not created equal and the pari passu option is one that can open new doors when seeking a mortgage. Our client is now in a favorable situation with its mortgage, and BlumShapiro is on call for additional initiatives when they arise.