SBA 504 LENDER WORKSHOP…

PART I:OBTAINING SBA LOAN APPROVAL

About Us

Our Goals for This Session

Understanding what it takes to obtain an SBA 504 approval

How to make the process as fast and efficient as possible

Section 504 CDC Loan Program Key Players:

US Small Business Administration Certified Development Companies Third-Party Lenders Small Business Applicant

Section 504 CDC Loan Program Began October 1980 Section 504 added to the Small Business

Investment Act in 1986 Provides access to fixed rate, long-term

funding in the public capital markets not otherwise available to small business

29 years of history have led to more than $63 billion in 504 loans

What is 504?

Purpose:

To foster economic development, create or preserve job opportunities and stimulate growth, expansion and modernization of small businesses

What is 504?

Definition: The 504 Loan Program is economic development financing specifically designed to stimulate private sector investment in long-term fixed assets to increase productivity, create new jobs, and increase the local tax base; the stimulus is provided by making long-term, low down payment, reasonably priced fixed-rate financing to healthy and expanding businesses which have the highest probability of successfully creating new jobs and competing in the world marketplace.

Economic Development

Job Goals Community Development Goals Public Policy Goals

Job Goals One new full-time job created per $65,000 of

the SBA loan Job retention can be used if reasonably show

job cost to community $75,000 in special geographic area $100,000 if a small manufacturer Borrower has two years to meet job creation

goal

Community Development Goals Improving, diversifying or stabilizing the

economy of the locality Stimulating other business development Bringing new income to the community Assisting manufacturing firms Assisting businesses in Labor Surplus Areas

Public Policy Goals Revitalizing a business district Expanding exports Expanding Minority Enterprise Development Aiding rural development Enhancing economic competition Restructuring because of federally-mandated

standards or policies

Public Policy Goals Assisting businesses in or moving to areas

affected by Federal budget reductions Veteran-owned businesses Women-owned businesses The project is energy-saving Reduction of rates of unemployment in labor

surplus areas

Project Costs – What’s Eligible?

Five Components to eligible project costs: Cost of acquiring a fixed asset

Cost of building and building improvements

Professional fees

Other expenses

Permissible debt refinance

Ineligible Project Costs

The borrower can and will incur ineligible project costs in connection with the project such as: Third-Party Loan fees

Attorney’s fees incurred in closing the loans

Franchise fees

Brokers fees

Cost of interior finishing space to be leased to a third party

These cannot be part of the project or paid by the 504 loan

An Eligible Borrower Must: Be an operating business

Be organized for profit

Use and/or occupy the project property

Be a small business under size requirements

In CDC’s geographic jurisdiction

Project must have a “sound business purpose”

Demonstrate a need for desired credit

*Eligibility determined at time of application

Ineligible Types of Businesses The SBA lists 20 types of businesses as

ineligible for 504 loans. The most common are: Non-Profits

Passive Businesses

Businesses with an associate of poor character

Prior government default

Non-US Citizen

Size Standards - 504 Less than $15 million tangible net worth Less than $5 million average net income

after taxes for previous two years 7(a) size standards can also be used

-25% higher allowed if project in a Labor Surplus Area

-Size determined as of date of the loan application

-Size determination is for applicant and all affiliates

Size Standards – 7(a)

Size Standards - Affiliations

Concerns and entities are affiliates of each, when one controls or has the power to control the other, or a third party/parties controls or has the power to control both

Size Standards - Affiliations Affiliation can arise through:

Stock ownership Agreements to merge Common management Identity of interest

Newly organized concern rule

Joint ventures Franchise or License Agreements

Franchise & License Agreements

Franchise & License Agreements Review of Franchise Agreements to determine

if there is affiliation is complex To speed up the approval process, a third

party, Frandata, has developed the franchise registry, where franchisors can be “pre-approved” for eligibility review

Franchise/License agreements must be cleared by SBA prior to application submission

Franchise & License Agreements

SBA 504 Loan Structure

Financing Structure

Single Purpose or Start-Up: 50/35/15

Single Purpose & Start-Up: 50/30/20

Permanent/Interim Loan Borrower Equity

EPCs & Operating Companies General Rule: SBA business loans are only

made to operating businesses that own and use the business property

The only exception is for an SBA business loan to allow an Eligible Passive Concern (EPC), which in turn acquires the project property that is leased to the Operating Company (OC)

The ultimate beneficiary of the SBA loan is the operating small business

EPCs & Operating Companies The structure can be EPC/Borrower and OC

Guarantor or EPC Borrower and OC Co-Borrower

Loan must be structured as Co-Borrower when any other assets acquired with the 504 loan are owned by the OC

There can be multiple OCs in a 504 project, but only one EPC

EPCs & Operating Companies There must be a lease between

EPC and OC that requires: Term must be at least equal to loan

term Rent paid must be same as loan

payments Lease must be for entire property

EPCs & Operating Companies Occupancy

51% - 49% Existing facilities 60% - 40% New construction

For new construction, 20% can be leased long term and 20% temporarily. OC must begin to expand into the 20% temporary space within three years and occupy 80% of the building within 10 years

Guarantors If EPC/OC Structure, the OC must guarantee

Each stockholder owning 20% or more must guarantee the loan

Each spouse owning 5% or more must guarantee the loan when combined ownership interest of both spouses is 20% or more

6-Month Rule Applies Any person subject to the personal guarantee requirements 6 months prior to

the date of the loan application would continue to be subject to the requirements even if that person has changed his or her ownership interest to less than 20%. The exception to this rule would be a 100% relinquishing of ownership.

Loan Terms

SBA 20-year or 10-year term

Third-Party Lender If SBA is 20-year, must be at least 10-year

term

If SBA is 10-year, must be at least 7-year term

504 Loan Amounts

Minimum amount for a 504 debenture is $25,000

Maximum amount is $5,000,000 or $5,500,000 for energy reduction/production projects as well as manufacturing firms

Application

1. Credit

2. Guarantors

3. Eligibility

4. Project Costs

5. Collateral

6. Other

Application

Application - Credit

Three Years’ Business FTR IRS Form 4506-T

Interim Financials Income Statement Balance Sheet Aging A/R & A/P

Application – Credit

Debt Schedule Credit Reports New Business

12-Month Cash Flow Two Years’ Projected Income

Statement

Application - Guarantors

One-Year Personal FTR IRS Form 4506-T

Personal Financial Statement SBA Form 413

Credit Reports

SBA Form 413

Application – Eligibility

SBA Form 912 on each: Officer & Director (regardless of ownership)

Proprietor, Partner & Stockholder with 20% or more ownership in Operating Company

Owner with 20% or more ownership in EPC

SBA Form 912

Application – Eligibility

CAIVRS Applicant, Guarantors, & Affiliates

Affiliate Information Ownership or Management Control Last Two Years’ FTRs Statement why it is not affiliated

Application – Eligibility

Franchise Approval Pre-Application Includes Affiliated Franchises

Alien Clearance – USCIS Historic Approval – if applicable

Application – Project Costs

Signed Valid Purchase Contract Contractor Estimates Professional Fees

Application – Collateral

Appraisal Name SBA as Intended User Two of Three Methods Utilized Value must be at least 90% of Total

Project Cost, except in the case of a change of ownership

Application - Collateral

Environmental Questionnaire and RSRA Phase I Phase II Gas Stations Taking Other Collateral

Application – Other Items

Bank Commitment Letter Requires SBA Language with separate

refinance language, if applicable

Organizational Documents and FEINs – OC and EPC

Refinance Documents HCDC Forms

504 Loan Fees

$1,000,000 Project

$500,000 Third-Party Lender

$400,000 SBA Net Debenture

$100,000 Equity

$1,000,000

504 Loan Fees$400,000 Net Debenture

$0 SBA Guarantee Fee

$1,000 Fiscal Agent Fee

$6,000 HCDC Processing Fee

$1,668 Underwriter Fee

$5,640 HCDC Closing Costs

$414,308

$692 Balance to Borrower

$415,000 Gross Debenture

504 Loan Fees

Third-Party Lender charges its own fees & closing costs, including a one-time SBA Participation Fee of 0.5% of the TPL loan amount

$2,500 in this example Only paid if TPL is Senior Lien

Holder

Submission & Timing

HCDC Loan Committee OH & IN – First and third Thursday of

each month KY – second Thursday each month

Submission & Timing

SBA Approval Process Credit (Loan Authorization) Appraisal Environmental

For More Information…

Andy YoungVice President & Senior Loan Officerayoung@hcdc.com513.458.2232Angie HowardLoan Officerahoward@hcdc.com513.458.2215

Mike CroweLoan Officermcrowe@hcdc.com513.458.2233

@theHCDC