sba 504 loans-an important tool for community lenders 2015

SBA 504 LoansAn Important

Tool for Community Lenders

Alabama Bankers AssociationAnnual Meeting

June 14-18, 2015

1

Southern Development Council, Inc.

Dana Moore, Executive Director Jennifer Seymour Bhojwani, Business

Development Officer Beau Strong, Business Development Officer

2

Presenters today…

What is the 504 Loan Program? What customers are eligible for 504 financing? What is the 504 Loan process? Why would I offer the 504 Loan Program to my

customers? Myth vs. Fact What about the other SBA program, the 7A? Question & Answer

3

Purpose of presentation

Economic development financing tool Delivered/administered by CDCs (certified

development companies) 504 project generally has three main

partners; Bank, CDC, Small Business 504 project involves fixed asset financing to

for-profit businesses

4

What is the 504 Loan Program?

Business customers that are for-profit Applicant must use the project property

- Cannot finance assets for passive income except in the EPC/OC situation

Located in the United States or its territories Defined as “small” by SBA definition:

- Tangible net worth of $15 million or less; and - Average net income after Federal taxes of $5 million or less

for the preceding two fiscal years

5

What customers are eligible for 504 financing?

Operating company must occupy 51% of an existing building or 60% of a new building

Demonstrate a need for the 504 Loan by applying the “Credit Elsewhere Test” and “Personal Resource Test”

Meet an economic development objective of the 504 program –job creation/retention

6

What customers are eligible for 504 financing? (cont.)

Businesses that currently own land and are ready to construct their building

Now leasing with an option to purchase the property Currently own their facility and time to remodel,

renovate and/or expand Ready to purchase land and construct a building Want to move and purchase an existing building Expanding into new markets and want to add an

additional site Business needing new long-life equipment Leasehold improvements

7

What customers are eligible for 504 financing? (cont.)

SBA Loan Maximum 504 Loan amount

Standard 504 Loan Maximum $5million

Meets 1 of 14 Public Policy Maximum $5 million unless also meets Energy Maximum $5.5million goals

Manufacturer Maximum $5 million

per project8

How much financing can the 504 Program provide?

Contact the CDC

Structure the financing with the three partners – Third Party Lender, CDC, business applicant

Typical structure 50/40/10 > 50% financing provided by Third Party Lender of

eligible 504 costs> 40% financing provided by CDC> 10% down payment provided by business

applicant9

What is the 504 Loan process?

Alternate structure 50/35/15 – required for new businesses or limited or special purpose property 50% financing provided by Third Party Lender of

eligible 504 project costs 35% financing provided by CDC 15% down payment provided by business

applicant

10

What is the 504 Loan process? (cont.)

Alternate structure 50/30/20 - required for BOTH new businesses AND limited or special purpose property- 50% financing provided by Third Party Lender of eligible 504 project costs - 30% financing provided by CDC

- 20% down payment provided by business applicant

11

What is the 504 Loan process? (cont.)

Project Example:

-Total Project Cost $2,500,000 50% Third Party Lender Loan $1,250,000 40% 504 Loan (net of fees) $1,000,000

10% Borrower down payment $ 250,000 Total Sources of Funds

$2,500,000

12

What is the 504 Loan process? (cont.)

Project Example (cont.) There is a one time Third Party Lender participation fee paid to SBA at the closing of the SBA loan. It is ½ of 1% of the Third Party Lender Loan.

In our example above, it would be $1,250,000 x .005 = $6,250

13

What is the 504 Loan process? (cont.)

Third Party Lender Loan- 50% permanent loan

Must be for a term of at least 7 or 10 years, depending on the length of the 504 Loan

Third Party Lender receives 1st lien position on assets financed

Interest rate charged must be legal and reasonable Must not have any cross-default or cross-collateral

feature(s) Third Party Lender also provides a bridge (interim) loan

for the net 504 Loan amount.14

What is the 504 Loan process? (cont.)

504 Loan (CDC loan) Funded through the sale of a debenture –fully

guaranteed by SBA Either a 10 or 20 year fully amortized note Subordinate position on assets financed Fixed interest rate for the full term of the loan Collateral usually limited to the assets financed Take-out financing –pays off the bridge (interim) loan

provided by the Third Party Lender All CDC/SBA fees other than TPL fee are financed by

the CDC/SBA15

What is the 504 Loan process? (cont.)

Down payment by business applicant

Borrower must inject at least 10% of the 504 project cost, usually cash.

Alternate down payment: The borrower’s equity in land/building that will be part of the 504 Project.

In some cases, applicant’s down payment may be borrowed.

** SDC has a Revolving Loan Fund that can be used in some circumstances to help fund the equity requirement

16

What is the 504 Loan process? (cont.)

Borrower completes 504 application and submits to the CDC. A secure, online application is available at www.sdcinc.org . Documents such as tax returns can be securely uploaded.

CDC performs underwriting/credit review Bank provides commitment contingent upon SBA

approval CDC submits application to SBA for approval Authorization and Debenture Guaranty issued by SBA

upon approval17

What is the 504 Loan process? (cont.)

Third Party Lender performs their loan closing and advances both permanent amount and interim loan amount (net 504 Loan)

Upon project completion, CDC performs loan closing for 504 Loan

When a project is primarily financing asset acquisitions a simultaneous closing of both the bank and CDC/SBA loan is preferred

18

What is the 504 Loan process? (cont.)

504 Loan closing documentation forwarded for legal review

504 Loan (debenture) is “pooled” with other 504 Loans

Net debenture proceeds (504 Loan) are wired to the Third Party Lender to payoff interim loan.

Timing from closing to funding is generally 45-60 days

19

What is the 504 Loan process? (cont.)

Borrower makes payments on two loans,Third Party Lender loan and 504 loan

CDC services the 504 loan while the Third Party Lender services their permanent loan

20

What is the 504 Loan process? (cont.)

Advantages for the Third Party Lender- 50% Loan to Value- First lien position on assets being financed- Greater portfolio diversity and credit risk management.- Ability to compete in the market place

21

Why would I offer the 504 Loan Program to my customer(s)?

Improved capital performance measuresCRA CreditBalance sheet management – 504 projects

can be managed so that the take-out financing occurs before the closing of major reporting periods

Pricing and structure requirements can be achieved in advance with an eye toward selling the Third party Lender loan to the secondary market

22

Why would I offer the 504 Loan Program to my

customers? (cont.)

Advantages to your customerLow down payment (generally 10-15%)Low, fixed interest ratePreservation of borrower’s working capitalFully amortizing, long term loan (10 or 20 years)Preserves SBA eligibility for future projects vs. using 7a loan for fixed assets

23

Why would I offer the 504 Loan Program to my customers? (cont.)

In tighter economic conditions may be the only option

Interest rate of bank financing may be more favorable due to the Third Party Lender’s low LTV

Can finance closing and other soft costs including interim interest and origination fee on interim loan

Collateral usually limited to assets being financed

24

Why would I offer the 504 Loan Program to my customers ? (cont.)

Advantages to the community

- JOBS JOBS JOBS- Capital investment increases tax base- Stimulates other development- Expanded access to capital

25

Why would I offer the 504 Loan Program to my customers? (cont.)

Similar information as provided for the Third Party Lender loanHistorical Financial StatementsPersonal Financial Statement(s)Tax ReturnsFinancial projections if a new business or historical performance doesn’t cover existing and new debtAppraisalEnvironmental assessmentCommitment letter from Third Party Lender

26

What documents are required in a 504 Loan application?

504 projects may include a limited amount of debt refinancing

If the project involves expansion, any amount of the existing debt that does not exceed 50% of the cost of the expansion my be refinanced

27

New for 504 Loan Program:Debt Refinancing

Fact: From the time a completed 504 Loan application is received by the CDC and submitted to SBA for approval, the process usually takes three to five working days.

28

Myth: “SBA loans take way too long.”

Fact: Much of the paperwork for a 504 Loan is the same as the paperwork provided to the Third Party Lender. Copies are shared between the Third party Lender and the CDC.

Documents and information can be securely uploaded to SDC’s secure server at www.sdcinc.org

29

Myth: “SBA loans have too much paperwork.”

Fact: The 504 Loan program is designed for expansion of healthy, credit-worthy businesses. However, the 504 Loan Program may also be used for start-up businesses.

30

Myth: “SBA loans are last resort financing.”

Fact: Fees for the 504 loan are as follows:

Bank Fee .5%

(based upon the amount of Third Party Lender’s permanent first lien loan)

31

Myth: “SBA Loans have too many fees.”

CDC Processing Fee 1.50% SBA Guarantee Fee .50% Funding Fee .25% Underwriting Fee .40% TOTAL 2.65%

All of these fees based upon the CDC/SBA loan amount only, and are added to the CDC/SBA loan.

May also add closing costs in the 504 Loan up to $5000 which are amortized over the life of the loan.

32

Myth: “SBA Loans have too many fees.”

Fact: In recent years, 504 Loan interest rates have been at market rate or below.

- Note: 504 Loans (40% of the financing package) have fixed interest rates which help provide an excellent blended interest rate with the Third Party Lender loan (50 of the financing package).

33

Myth: “SBA Loan interest rates are too high.”

Fact: The borrower and Third Party Lender don’t have to remember the rules. Call your CDC expert who knows the details of the 504 Loan Program. It is the CDC’s responsibility to know the rules to navigate eligibility and ensure compliance.

34

Myth: “SBA means lots of regulations I have to

remember.”

Winner! Third Party Lender

Winner! Small Business

Winner! Community

35

504 Loans: Let out the well-kept secret!

Provides financing for businesses through a bank The SBA guaranty facilitates the extension of credit Usually utilized for lines of credit and working capital

financing, debt refinancing, short term equipment May be used as a companion loan with 504 Loan Guarantee is 85% for loans $150,000 and less Guarantee is 75% for loans greater than $150,000 International Trade loans and Export Working Line of

Credit Loans have 90% guarantee rates

36

7(a)…the other side SBA Program

37

Question & Answer

Southern Development Council, Inc.8132 Old Federal RoadMontgomery, AL 361171-800-499-3034 or 334-244-1801www.sdcinc.org

dnmoore@sdcinc.orgjennifer@sdcinc.org cell 334-318-1482strong@sdcinc.org cell 334-318-1448

38

Contacts