The SBA 504 Loan Program SERVICE EXPERTISE EXPERIENCE
The SBA 504 Loan Program SERVICE EXPERTISE EXPERIENCE DEPENDABILITY
SEED’s Loan Programs Currently, SEED administers three loan programs: • SBA 504 Loan Program – Loans up to $5. 5 million for real estate and heavy machinery and equipment. • Small Loan Program – Loans up to $250, 000, usually as part of a larger project, with flexible use of funds. • Micro Loan Program – Loans up to $50, 000, flexible use of funds. 2
Where is SEED’s 504 Geographic Coverage ? SBA 504 Program: All of Massachusetts and Rhode Island (except Washington County) 3
What is the SBA 504 Loan Program? • It is the Small Business Administration’s (“SBA”) “economic development financing program. ” • Loans are provided to expanding small businesses to aid in job creation. • SBA loans are guaranteed by the Federal Government. 4
Goal of the Presentation • General understanding of the SBA 504 Loan Program – from origination to servicing! • Learn about the 504 Program features and benefits. • For even more detail, including forms, regulations and the Standard Operating Procedure (SOP) Manuals ~ visit www. sba. gov/for-lenders 5
The Role of SEED Corporation • The SBA 504 Program is administered through SBA Certified Development Companies (CDC’s) ~ like SEED Corporation that was formed in 1982 when the program first began; • SEED underwrites, packages, closes and services SBA 504 loans on behalf of the U. S. Small Business Administration. 6
Selling the 504 Option If the answer to any of the following questions is yes, then give the customer an introduction to SBA 504: ü Is working capital important to the success of the business? Is long-term fixed rate important for cash flow? ü ü Is a low down payment important? ü Does the business want protection in the event of a devaluation of real estate? 7
SBA 504 Loan Program Benefits to the Borrower: • Financing for a fixed asset project with as little as a 10% injection; • Long-term, fixed rate funds…enhancing cash flow for business; • SEED’s interest rate as of March 2017 is: - 4. 89% on a 20 -year debenture - 4. 53% on a 10 -year debenture • 8
SBA 504 Loan Program Benefits to the Borrower (cont. ): • Ability to include soft costs, equipment and furniture and fixtures in a real estate project … enabling businesses to minimize out of pocket expenses and preserve cash; • Lower down payment conserves working capital. 9
SBA 504 Loan Program Benefits to the Bank: • Bank’s maximum loan-to-value is typically 50%, minimizing risk and improving liquidity; • Ability to provide 90% financing to a small business client; • Program allows reliance on financial projections – for startups and businesses with inadequate historic cash flow; 10
SBA 504 Loan Program Benefits to the Bank (cont. ): • The bank’s first mortgage can be sold in the secondary market for a premium. The CDC is responsible for all of the paperwork!! 11
What is needed for SEED to approve a 504 request? • Purchase & Sales Agreement for project property, cost estimates for any construction or renovation projects and equipment estimates, if applicable; • Three years of tax returns on the business and interim financial statements if beyond 120 days of the company’s FYE; • Information on the borrower’s existing debt. 12
What is needed for SEED to approve a 504 request? • Current personal financial statement and two years of personal tax returns for each principal of the business (20% or more ownership); • Property appraisal and environmental assessment can be submitted to SEED after approval. No Application Form is required! We essentially use the same underwriting documentation as the bank! 13
Use of Funds Fixed-Asset Acquisition or Expansion: • Purchase land construct new buildings; • Purchase and/or renovate existing buildings; • Construct an addition to an existing building; • Construct or remodel buildings on leased land; • Acquire / install machinery and equipment; 14
Use of Funds (cont. ) • Soft costs related to the project (appraisal, environmental assessment, interim interest, and professional fees); • Refinance existing eligible fixed asset debt up to 50% of new expansion project; • Available June 2016! Direct Debt Refinance up to 90% LTV; excluding any government financing (SBA 504, 7 a, USDA); 15
Use of Funds (cont. ) Ineligible use of funds: • Purchase of trucks, autos and airplanes; • Working capital; • Franchise fees; • Management fees and advertising; • Incorporation / organization costs; Contact SEED (508) 822 -1020 for Loan Structure! 16
Project Size Requirements Minimum Amount of 504 Loan: • $25, 000 – SEED calculates costs and benefits for 504 projects under $300, 000 and may use other loan funds Maximum Amount of 504 Loan*: • Up to $5 million for most businesses • Up to $5. 5 million for manufacturers and projects generating renewable energy or fuels *There is no maximum limit to project size 17
Job Requirements Borrowers must create one (1) job for every $65, 000 funded (SBA Portion) Exceptions: • Manufacturing businesses provides one (1) job for every $100, 000 funded (SBA Portion); • Projects that meet any of the SBA Public Policy Goals or Community Development Goals. 18
Public Policy Goals Not required to create one (1) job for each $65, 000 • Revitalizing a business district of a community (a written revitalization/redevelopment plan); • Expanding exports; • Expanding minority-owned, woman-owned or veteran-owned businesses; 19
Public Policy Goals (Cont. ) Not required to create one (1) job for each $65, 000 • Aiding rural development; • Energy-consumption reduction of at least 10% or sustainable design or equipment and process upgrades; • Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports); 20
Public Policy Goals (Cont. ) Not required to create one (1) job for each $65, 000 • Modernizing or upgrading facilities to meet health, safety, and environmental requirements; • Assisting businesses in, or moving to, areas affected by Federal budget reductions (base closings within 10 years); 21
Community Development Goals Not required to create one (1) job for each $65, 000 • Improving, diversifying or stabilizing the economy of the locality; • Stimulating other business development; • Bringing new income into the community; • Assisting manufacturing firms; • Assisting businesses in Labor Surplus Areas as defined by the Department of Labor; 22
Not Eligible for 504 Funding • Non-Profits; • Lending Institutions; • Life Insurance Companies; • Private Clubs; • Speculative Investment; • Non-owner occupied buildings; 23
Not Eligible for 504 Funding (Cont. ) • Gambling concerns; • Businesses engaged in promoting religion; • Cooperatives (exception for some producer coops); • Political or lobbying services; • Businesses located in a foreign country or owned by a non-resident alien; • Businesses selling through pyramid plans; 24
Not Eligible for 504 Funding (Cont. ) • Businesses engaged in sales or services of a prurient sexual nature; • Businesses with prior loss to the government; • Relocation of a small business causing a net deduction of one third or more of its workforce or a substantial increase in area unemployment. 25
Structure of a Typical $1 Million Project Entity Loan Amount % of Project Lender $500, 000 50% 1 st Mortgage SEED/SBA $400, 000 40% 2 nd Mortgage Borrower $100, 000 10%* TOTAL: $1, 000 100% Security Total Debenture: $409, 000 ($8, 600 rounded up) (Up front fees of 2. 15% on $400, 000; included in the debenture) * Projects that involve a new business and/or special purpose building will require an additional 5 -10% from the borrower. 26
Typical Structure for Established Business 27
Typical Structure for Special Purpose Building OR Start-Up 28
Typical Structure for Start-Up Business AND Special Purpose Building 29
Eligible Project Costs Land Construction Contingency (10%) Site Preparation Machinery/Equipment Furniture/Fixtures Soft Costs ~ Permits Architect/Engineer Appraisal Environmental Report Title Insurance Interim Interest & Fee TOTAL $ 200, 000 60, 000 10, 000 50, 000 20, 000 50% Bank 40% CDC 10% Owner 100% $500, 000 $400, 000 $1, 000 2, 500 25, 000 4, 000 2, 500 1, 000 25, 000 $1, 000 30
Fees Charged by the CDC Financed as part of 504 loan – 2. 15% of net debenture CDC Processing Fee: 1. 50% SBA Guarantee Fee: Paid to SBA- one time fee 0. 00% Underwriting Fee: Covers expense of pooling & underwriting 504 debenture, paid directly to Merrill Lynch 0. 40% Funding Fee: Paid to Central Servicing Agent (Price Waterhouse) 0. 25% Total: 2. 15% Effective 10/1/15, the SBA Guarantee fee has gone to zero from 0. 50%!
Other Requirements Occupancy: • Business must occupy at least 51%; • Business must initially occupy at least 60% of a newly- constructed building and 80% within 10 years. Jobs: • Create/Retain one job for each $65, 000 borrowed through the 504 Program unless the project meets a Public Policy Goal; • Manufacturing Businesses- one job per $100, 000. 32
SBA Debt Refinance Program (Returned 6/24/2016) Eligible Debt • Secured by fixed assets and be in place at least two years; • Borrower must have been in business two years and 85% of the loan must have been for Real Estate or Equipment; • Any debt being refinanced must have been current for the last 12 months. 33
SBA Debt Refinance Program (Returned 6/24/2016) Eligible Costs • Owner-occupied commercial real estate or equipment (not Federal debt); • Other debt secured by the same assets (i. e. line of credit); • Closing Expenses; • Eligible business expenses that do NOT exceed 25% of the value of the assets, including utility bills, rent, salaries, inventory, etc. 34
SBA Debt Refinance Program (Continued) Loan-to-Value (LTV) • LTV of 90% for commercial mortgage and other debt only (additional collateral may be pledged to achieve 90%); • LTV of 85% when eligible business expenses are included (eligible business expenses are limited to 25% of the value of the fixed asset; additional assets CANNOT be used to increase the amount of the “cash out”). 35
SBA Debt Refinance Program (Continued) --Loan-to-Value (LTV) Fees/Costs • All regular 504 costs apply and are financed in the 504 loan; • Third Party Lender fee of 0. 5% still applies; • The ongoing fee is slightly higher (0. 797% vs. 0. 697%) which has a minor (0. 10%) impact on the effective rate. 36
Ownership of Building • By the Operating Company (OC); • By an Eligible Passive Company (EPC) • Individuals • New Corporation • Partnership • Limited Liability Company • Trust 37
Guarantees Required for any principal with 20% ownership or more in Operating Company (OC) or Eligible Passive Company (EPC). 38
Size Standards Business – when combined with affiliates must: ● Have less than $15 million in tangible net worth; ● Have less than $5 million in net income after taxes (average for last 2 years); ~OR~ Use 7 A standards as an alternative. *Size standards are increased by 25% in labor surplus areas 39
What’s An Affiliate? (1) Affiliation based on ownership Ownership or power to control more than 50% of the concern’s voting equity; If no majority interest – “SBA will deem the BOD, President or CEO (or other officers, managing members or partners) to be in control”; Also minority owners if they hold the right through negative control within the charter or by-laws. Changes effective 7/27/16 40
What’s An Affiliate? Major Change: Franchise/License Agreements: SBA does not find the mere existence of a franchise or license creates affiliation ~ so as long as they: Have a right to profit from its efforts; and 2. Bears the risk of loss commensurate with ownership. 1. Changes effective 7/27/16 41
Appraisals ● SBA requires a real estate appraisal if the estimated value of the project is greater than $250, 000; ● All appraisals must be addressed to both the Bank and the U. S. SBA and be consistent with Uniform Standards of Professional Appraisal Practice (USPAP); ● Be performed by a state certified or state licensed appraiser and for all the loans over $1, 000 the appraiser must state certified; 42
Appraisals (Cont. ) ● For new construction or substantial renovations, appraiser must estimate “as complete” value and recertify at completion --CDC must obtain a statement from appraiser indicating the project was built with only minor deviations from plan; ● If a going concern value is requested due to special purpose nature of the building, appraiser must allocate separate values to the individual components --When collateral is special purpose, the appraiser must be experienced in the particular industry; 43
Appraisals (Cont. ) ● An appraisal must be submitted with an application if relying on owner’s equity for injection. 44
Environmental Reports Questionnaire Only -● If 504 loan amount is up to and including $150, 000; ● No match to an environmentally sensitive industry; ● Environmental Questionnaire results in no findings; If findings and over $150, 000, then at a minimum – Environmental Questionnaire and Records Search with Risk Assessment (RSRA) is necessary 45
Environmental Reports (Cont. ) Environmental Questionnaire and Records Search with Risk Assessment: ü Unlikely there is environmental contamination; ü Risk Assessment states “Low Risk”; ü If “Elevated Risk” or “High Risk” – Phase I required; 46
Environmental Reports (Cont. ) Transactional Screening Analysis (TSA) Required: • Environmental Professional must conclude that no further investigation is warranted (reliance letter required); • If opinion warrants further investigation, a Phase I must be obtained. 47
Phase I Environmental Site Assessment (ESA) Results • If “no further investigation warranted, ” Phase I report may be submitted to SBA for approval including the SBA Reliance Letter; • If report’s conclusion is “further investigation warranted” the CDC must proceed as recommended by the Environmental Professional; SBA will require compliance with all Environmental Professional recommendations; • Phase II ESA or Supplemental Reports Required. 48
Phase II Environmental Site Assessment (ESA) Results • If “no further investigation warranted, ” Phase II report may be submitted to SBA for approval including the SBA Reliance Letter; • If report’s conclusion reveals contamination, the CDC will need to determine if they will proceed with the project; • CDC will determine whether disbursement is appropriate according to subparagraph G, Pages 266 -269 of SBA SOP 50 10 5(I). 49
The 504 “Process” • Borrower or the bank submits a loan package to SEED; • SEED conducts preliminary review and works with bank and client; • The loan request is presented to SEED’s Loan Review Committee (meeting or email); • A commitment letter is sent to the borrower with a copy to participating bank; • Loan is packaged and forwarded to SBA Central Office in Sacramento, California for issuance of the Authorization. 50
The 504 “Process” SEED is an Abridged Submission Method (ASM) lender, and submits required forms to SBA plus: ü Purchase & Sale Agreement ü Construction Cost Estimates ü Bank Commitment Letter SBA approves “ASM” SBA 504 loans within 3 days assuming all eligibility requirements are met, and the paper work has been filled out properly. 51
The 504 “Process” Potential process delays: Franchise reviews; 912 criminal clearances; INS (Immigration) confirmations and gasoline jobber agreement reviews; Bank closes on permanent loan and bridge loan; SEED/SBA payoff the bank’s bridge loan in 90 days on turnkey projects or after the project is completed (construction & renovation projects); SBA Authorization (commitment) is valid for four years (48 months). 52
Bank’s First Mortgage • Permanent financing must be for at least 10 years – (on a 20 -year debenture) with no balloon payments during that time; • Interest rate on the bank’s mortgage is set by bank; • Bank can charge points; • One-time fee of 0. 50% on the bank’s first mortgage is charged by the SBA. * * Ask us about our first-time lender incentive! 53
Interim Loan (Bridge Loan) • Used to provide small businesses with financing needed since SBA 504 closing always occurs at least 60 days before the debenture sale; • Used to facilitate change of ownership within time frame specified in the P&S Agreement; • Used to finance construction and/or improvements to property – if applicable ; • Bank makes disbursement and supervises construction. 54
Legal Fees Closing costs are financed into the gross debenture and paid to CDC’s closing attorney • Legal Fee – Maximum of $2, 500; • Other Eligible Closing Costs: • Title insurance • Recording fees • Flood insurance • Filing fees and title searches • Surveys 55
Debenture Rate Negotiated by Underwriters, DCFC and the U. S. Government • Based on current market conditions at the time the debenture is sold; • Paid to bond investors on semi-annual basis. 56
Effective Rate the borrower actually pays Note rate (as of 03/17 Sale – 20 yrs) Plus Fees: Annual Central Servicing Agent Fee CDC Servicing Fee (SEED. 875 + SBA. 125) SBA Fee Total Fees 3. 093% SEED’s Interest Rate (As of 03/17) 4. 890% 0. 100% 1. 000% 0. 697% 1. 797% SBA Required Servicing Fee – This fee can go up to 1. 5%. CDC’s Servicing Fees vary and impact the client’s effective rate! 57
Simultaneous SBA 504 Closing with Bank Closing • Project is turnkey – does not involve construction or setting up of heavy machinery and equipment; • Bank and SBA 504 documents are signed at the same time to simplify process for bank and client; • A follow-up list of items may be needed prior to funding and bank reimbursement. 58
Funding the 504 Loan When SBA Authorization is received: • CDC reviews for changes and/or errors; • Copies sent to Borrower and Bank with instructions; • Bank orders Appraisal and Environmental Review (if not already completed); • CDC orders Preliminary Title and UCC searches (if needed); • Work begins on obtaining required documents – corporate resolutions, certificates of good standing, etc. 59
Next Step in Funding Process Before a debenture sale date is set: • Title must be taken by new owner; • Interim loan must be fully disbursed; • Construction or remodeling must be complete; • Permanent Certificate of Occupancy or Certificate of Completion must be forwarded to CDC; • Borrower’s financial statements must be current within 120 days of targeted funding date. 60
Next Step in Funding Process Once debenture is sold: • Funds are wired to bank to pay down interim loan; • Letter sent to borrower stating effective loan rate, payment amount and due date of first payment; • One week later, final closing letter sent to borrower with amortization schedule and debenture note; Please Note: It can take up to three months to fund the 504 Debenture once project is completed 61
Events that Can Delay Funding Process • Changes in project costs; • Lower than expected appraisals; • Incomplete or negative environmental investigations; • Changes in borrower's organizational structure; • Adverse financial change in the operating company; • Lawsuit, divorce, or other legal issues; • Certificate of Occupancy. 62
Prepayment First Half of 20 -Year Debenture Prepayment Estimate Based on March 2017 Funding Year 1 2 3 4 5 6 7 8 9 10 After 10 % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % of Principal Outstanding 103. 09% 102. 78% 102. 47% 102. 16% 101. 86% 101. 55% 101. 24% 100. 93% 100. 62% 100. 31% 100. 00% Prepayment is based on the negotiated rate plus principal in year one and 10% less each year after. 63
What’s New? • Revised Franchise Policy; • Simplified / Timelier Personal History Procedures; • No name change! The rebranding to “Loan Grow Program” has been rescinded! We remain 504!! 64
Franchise Updates • No more Franchise Registry! • In order to establish there is no affiliation, obtain an Addendum to Franchise Agreement (2462) or Certification with SBA’s previously negotiated addendum (2463); • CDC must submit a copy of the Franchise Agreement and one of the Addendums prior to submitting the application to SLPC; • When franchisor has multiple agreements, SBA will only require review of Small Business Applicant! 65
912 – Personal History Statement • Gather 912’s on same parties as before (20% or more owner of OC or EPC and key personnel) – however, if all “no’s” to questions – just keep in application file; • If yes to either 8 or 9, obtain character determination info (date of offense, where, specific charge and level – misdemeanor or felony – and disposition of charge) for CDC to determine next steps; 66
912 – Personal History Statement • If CDC determines court’s disposition in case(s) resulted in one or multiple misdemeanor convictions whose conditions were met more than six months prior to application, then CDC will retaining supporting documentation and no further 912 review is necessary; • If disclosure reveals convictions within six months or crimes against a minor, then a background check must be completed by SBA; 67
912 – Personal History Statement • Background check sent to SBA will also require a Fingerprint Check (FD 258 or Electronic); • The SLPC will not approve the loan until formal clearance is received in writing from the D/OFA or designee. 68
Project Profile: 10% Down Payment (Standard) Personnel Company – Acquisition of Existing Building Purchase of Land & Building Improvements Soft Costs Bank (50%) SBA 504 (40%) Client (10%) • • $925, 000 148, 000 27, 000 $1, 100, 000 $550, 000 $440, 000 $110, 000 Client has been in business over two years, and is purchasing a 10, 000 sq ft multi-purpose building for expansion (will lease 40%). Collateral Coverage is based on 90% Loan to Value. 69
Project Profile: 15% Down Payment (New Owner) Purchase of Existing Restaurant (New Owner) Considered new operation: Building Purchase Price Bank (50%) SBA 504 (35%) Client (15%) $1, 200, 000 600, 000 420, 000 180, 000 • Client has historical restaurant experience; • Collateral Coverage is 85% Loan to Value; • Building must appraise adequately or additional funds are considered goodwill and must be satisfied outside the 504 70 transaction.
Project Profile: 15% Down Payment (Special Purpose) Acquisition of a Special Purpose Bldg – Gas Station Building Purchase Price Bank (50%) SBA 504 (35%) Client (15%) $675, 000 337, 500 236, 250 101, 250 • Client is a three year operator of this leased location and wants to purchase this special purpose facility; • Collateral Coverage is 85% Loan to Value on a special-purpose building. 71
Project Profile: 20% Down Payment (Special Purpose & New Owner) Start-Up Hotel Purchase of Land Building Construction FF & E Professional Fees Contingencies/Interim Interest $1, 500, 000 5, 000 950, 000 70, 000 380, 000 $7, 900, 000 Bank (50%) SBA 504 (30%) Client (20%) 3, 950, 000 2, 370, 000 1, 580, 000 • • Client is starting up a flag hotel; Collateral Coverage is based on 80% Loan to Value on a start up, single purpose real estate project (includes 72 furniture, fixtures & equipment).
Why YOU Should Consider a SEED/SBA 504 Loan ü ü ü Up to 90% financing for 504 projects; ü ü Note is assumable by another borrower; ü SEED is responsible for all the paperwork; No application form to fill out. Lower down payment for client; improved liquidity for bank; SEED provides quick & efficient turn around (SBA approved for the Abridged Submission Method); SEED offers a low 504 rate; provides loans up to $250, 000 at 5% fixed to assist with working capital or replace the down payment; 73
Your SEED/SBA Experts Lisa Holmes (508) 822 -1020 x 315 lholmes@seedcorp. com Angela Laperriere (508) 822 -1020 x 312 alaperriere@seedcorp. com Laurie Driscoll (508) 822 -1020 x 316 ladriscoll@seedcorp. com Liz Voss (508) 822 -1020 x 330 evoss@seedcorp. com South Eastern Economic Development Corporation 80 Dean Street, Taunton, MA 02780 www. seedcorp. com
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