1

SBA 504 Program SBA 504 Program Overview Overview

Georgia Small Business Capital

2

– 504 Program Features & Benefits to Banks– Loan Processing, Closing & Servicing

General understanding of the SBA504 loan program from origination to servicing.

Goal

3

Benefits to Banks

1st lien position with low loan-to-value –- reduces collateral risk

CDC staff manages all SBA forms, packages, closes & services the SBA loan

Provide customers opportunity to obtain 504 loan building stronger banking relationships

50% funding allows banks with in-house lending limits to preserve available funds for borrower’s working capital/growth

Helps with CRA credit requirements

You set your own rate and fees

4

Benefits to Borrower

Up to 90% financing for project

Long-term, fixed rate funds … enhancing cash flow for business

10 or 20 year term … avoids balloon payments or loan extension

Lower down payment conserves working capital

5

How 504 Works for You -

Mitigation of credit risk

Liquidity management

Managing overall lending limits

Strengthening core earnings through a highly marketable commercial lending product

Serving your customer’s needs in the community

6

Use of Funds

Fixed-Asset Acquisition or Expansion Including:

Purchase land & construction of new buildings Purchase and/or renovate existing buildings Acquire/Install machinery Construct or remodel buildings on leased land Soft costs involved in above projects

7

Maximum Amount of Loan

Up to $4,000,0000Maximum 40% of project costs ($2,000,000 if within

SBA Public Policy Goals)

Minimum Amount of Loan

$50,000There is no maximum limit to project size.

Project Size Requirements

8

Job Requirements

Provide one job for every $65,000 funded

Exception:

Projects that meet SBA Public Policy Goals

9

Public Policy Goals

Rural Development

Expansion of Minority, Women or Veteran-Owned Business Development

Expansion of Exports

Business District Revitalization

Enhanced Economic Competition

Restructuring Due to Federally Mandated Standards and/or Policies

Changes Necessitated by Federal Budget Cutbacks

Opportunity to fund up to $4 Million and Not Required to Create one job for each $65,000

10

Not Eligible for 504 Funding Non Profits

Lending institutions

Life Insurance companies

Private clubs

Speculative investment

Non-owner occupied building

Gambling concerns

Businesses engaged in promoting religion

Cooperatives

Political or lobbying services

Businesses located in foreign country or owned by an alien

Businesses selling through pyramid plans

11

Typical Structure for Established Business Loan

Bank -50%

SBA 504 Loan -40%

Owner’s Equity –10%

12

Typical Structure for a Special Purpose Building OR Start-up

Bank50%

SBA 504 Loan 35%

Owner’s Equity15%

13

Typical Structure for Start-Up Business

AND Special Purpose Building

Bank 50%

SBA 504 30%

Owner’s Equity 20%

14

Financing on Typical $1 Million Project

Loan % ofEntity Amount Project Security

Lender $500,000 50% 1st Mortgage

CDC/SBA $400,000 + 40% 2nd Mortgage fees

Borrower $100,000 10%

TOTAL: $1,000,000 100%

15

Eligible Project Costs:

Land $ 125,000Construction 625,000Contingency 29,000Permits 2,000Site Preparation 5,000Architect/Engineering 25,000Machinery/Equipment 144,000Appraisal 4,000Environmental Report 2,000Interim Loan Fee 9,000Interim Interest 30,000 (Construction period + 3 months)

TOTAL $1,000,000

50% Bank $500,00040% CDC $400,00010% Owner $100,000

100% $1,000,000

Any costs incurred within 9 months prior to submission to SBA

are eligible toward total project costs

16

Ineligible Costs: Debt Refinancing

Third Party Loan Fees

Ancillary Business Expenses-

Working capital

Counseling or management services fees

Incorporation/organization costs

Franchise fees or Advertising

Fixed Asset Project Components -

Short term equipment

Auto/trucks

Construction equipment

17

Occupancy Requirements

Existing Building: Business must occupy at

least 51% - may lease out the other 49%

Newly Constructed Building: Business must occupy at least 60% - must occupy up to 80% within 10 years

18

Ownership of Building

By the Operating Company (OC)

By an Eligible Passive Company (EPC)• Individuals• New corporation• Partnership• Limited liability corporation• Trust

Ownership need not be identical

19

Size Standards

Business – when combined with affiliates must:

Have less than $7,500,000 tangible net worth

Have less than $2,500,000 in net income (average for last 2 years)

There is no limitation on annual sales volume

20

Availability of Personal Resources

Any business owner of 20% or more can retain personal liquid assets (cash or securities) according to a tiered schedule.

Requirements are the same as in the 7(a) program.

21

Appraisal Requirements

When more than $250,000 of loan proceeds are used for real estate transactions

For loans over $1,000,000 New construction

22

Environmental Requirements

Questionnaire Only –

Bare land no history of agricultural use When Phase I completed within 1 year Project involves multi-unit condominiumTSA or Phase I required-

When questionnaire indicates risk of environmental contamination

23

Comparison Conventional vs 504 Loan

Assumptions: Total project costs = $1,000,000

$ 100,000 Owner contribution (10%) $ 900,000 Total financing required (90%)

7.00% Interest Rate on Conventional Loan 25 Amortization on conventional/bank portion

5.50% Rate of interest on SBA loan 20 Amortization on SBA portion

24

Comparison Conventional vs 504 Loan

Conventional Financing Scenario -

Loan Amount Rate Amortization Interest Paid $900,000 7.00% 25 year $2,390,000

SBA/CDC 504 Financing Scenario -

Loan Amount Rate Amortization Interest PaidBank $500,000 7.00% 25 year $1,328,000CDC $406,000 5.50% 20 year $ 269,000

$1,597,000

25

Comparison Conventional vs 504 Loan

Conventional – Total Interest$2,390,000SBA 504 – Total Interest$1,597,000

Interest Savings to Business with 504 = $793,000

26

Prepayment

Prepayment penalty applies

Depending on interest rate, it may be beneficial to prepay the bank loan first

Two prepayment windows are available to minimize interest expense

First Half of 20 year Debenture

27

Fees Charged by CDCFinanced as part of 504 loan – 2.15% of net debenture

CDC Processing Fee:1.50%

Underwriting Fee: 0.40%Covers expense of pooling & underwriting 504 debenture –paid directly to Merrill Lynch

Funding Fee:0.25%Paid to Development Company Funding Corporation

Total: 2.15%

28

Legal Fees

Closing costs can be financed into the gross debenture & paid to CDC’s closing attorney

Legal costs incurred that are not financed –

Title insurance Recording fees UCC searches

29

Bank Fees

Bank Participation Fee – paid by GSBC

0.5% charge to Bank by SBA on the Bank’s permanent loan amount

Not included in SBA financing structure

30

Debenture Rate

Based on current market conditions at the time the debenture is sold

Paid to bond investors on semi-annual basis

Negotiated by DCFC, Underwriters & U.S. Government

31

Effective Rate

Rate the borrower actually pays

Note rate TBD% Annual Central Servicing Agent Fee 0.10%CDC Servicing Fee 0.625%Loan Loss Reserve Fee 0.021%

Effective Rate XX%

32

Interim Loan

Used to facilitate change of ownership within timeframe specified in the contract

Used to finance construction and/or improvements to property – if applicable

33

Bank’s Permanent Loan

Permanent financing must be for at least 10 years – (on a 20-year debenture) with no balloon payments during that time

Re-pricing is allowed – usually every 5 years

It’s possible to start amortizing the bank’s loan before the 504 loan is in place

34

Funding the 504 Loan

When SBA Authorization is received –

CDC reviews for changes and/or errors

Copies sent to Borrower & Bank with instructions

Bank orders Appraisal & Environmental review (if not already completed)

CDC orders Preliminary Title & UCC searches (if needed)

Work begins on obtaining required documents – corporate resolutions, certificates of good standing, etc.)

35

Funding Process

CDC schedules “Authorization Meeting” with Bank and Borrower to:

Review terms & conditions Set action steps & time line Review for errors Collect balance of borrower’s fee Sign authorization & collect any other documents

36

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 approx. 120 days of targeted funding date

37

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 & due date of first payment

One week later, final closing letter sent to Borrower with Amortization Schedule & Debenture Note

38

Important Notes:

It can take up to 3 months to fund the 504 Debenture once project completed

Any changes to the Authorization require SBA approval Borrower is prohibited from converting part of the interim loan to Bank’s term loan prior to funding the 504 loan

Bank should set the maturity date on interim loan to coincide with estimated 504 funding date not project completion date

39

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

40

Delay in receiving Subordination Agreements or UCC filings

Unexpected Deeds of Trust or Liens on collateral

Delays in obtaining a final title policy to property taken as collateral

Delays in completing documentation within time allotted

Property or owner insurance issues

Delays to Funding Cont:

41

Example of Estimated Timeline

Day 1… Project is complete. Title is transferred toBorrower. All outstanding documents havebeen submitted to CDC.

Day 15… File sent to CDC’s legal department for creation of legal documentation.

UCC requests sent to Borrower for signatures(if applicable).

Legal documentation sent to Borrower &Banker for review & signatures. UCC filingsreturned by Borrower & sent into State forfiling.

42

Day 60… Legal documentation returned & recorded.Final closing package forwarded to SBA forreview.

SBA Field office reviews package & forwards to the Central Servicing Agentfor next Debenture sale.

Day 90… Debenture sale. Interim loan paid down & closing letter sent to Borrower.

Day 135… Refund sent to Borrower & file forwardedto CDC servicing department.

Estimated Timeline Cont.

43

Responsibilities of Borrower & Banker

Inform CDC Loan Officer of any changes

Inform CDC Loan Officer when project complete

Submit all requested documentation

Provide proof of equity contribution by Borrower

44

Responsibilities of the Banker

Provide title insurance information to CDC Closing Department as soon as possible

Provide an appraisal to the CDC

Provide appropriate environmental investigation to the CDC

Provide letter stating interim loan is fully disbursed

45

Responsibilities of CDC Loan Officer

Continuous contact to track project progress

Resolve project cost increases/decreases or other changes

Answer questions & provide information

46

CDC Servicing Responsibilities

Loan servicing responsibilities include, but are notlimited to:

Monitor, track & review borrower’s financial statements, insurance coverage of collateral, physical condition of asset, payment of taxes & UCC continuations

Monitor loan repayment, collection & prepayment requests

Evaluate requests for change relative to original terms & conditions of the SBA 504 loan (i.e. collateral changes, ownership changes & assumptions)

Work-out situations, problem loans & liquidation

47

Feasibility Assessment for 504

Purchase & sale agreement or terms of sale

Cost breakdown of project

2 years of company tax returns and/or financial statements

Detailed schedule of long-term debt

Eligibility

Personal financial statement & 1 year of personal tax returns

48

504 Advantages to Pass on to your Clients

A low down payment to improve your client’s cash flow – They conserve valuable working capital and You have a stronger borrower

A fixed-rate 504 loan to minimize the risk of future rate uncertainty

A longer term to bring debt service in line with cash flow generated by a long-term asset

49

For Your Next Small Business Borrower

Planning an Expansion . . .

Consider an SBA 504 Loan

Contact GSBC to Make it Happen!