the “504” loan program

The “504” Loan ProgramThe “504” Loan Program

““504” Loan Program Purpose504” Loan Program Purpose

Stimulate private sector investment Stimulate private sector investment by:by:Creating (or retaining) job Creating (or retaining) job

opportunities. One Job / $50,000 opportunities. One Job / $50,000 & $100,00 for mfg.& $100,00 for mfg.

Increasing productivityIncreasing productivityIncreasing the local tax baseIncreasing the local tax base

““504” Program Objectives504” Program Objectives

Job creation or retentionJob creation or retentionPortfolio versus ProjectPortfolio versus Project

OROR Achievement of:Achievement of:

community development goals orcommunity development goals orSBA’s public policy goalsSBA’s public policy goals

““504” Lending Limits504” Lending Limits UP TO 40% of eligible “504” project costs:UP TO 40% of eligible “504” project costs:

$50,000 minimum$50,000 minimum

$1,500,000 maximum$1,500,000 maximum

$2,000,000 maximum for projects satisfying a $2,000,000 maximum for projects satisfying a

public policy goal*public policy goal*

$4,000,000 maximum for mfg. with $100,000 $4,000,000 maximum for mfg. with $100,000

minimum job requirementminimum job requirement

“ “504” Loan Terms: Maturity504” Loan Terms: Maturity

Maturity is Maturity is EITHEREITHER 10 10 OROR 20 years. 20 years. The “504” loan term is based on the The “504” loan term is based on the

economic useful life of the assets financed.economic useful life of the assets financed. For equipment financing, the term is 10 yearsFor equipment financing, the term is 10 years

(requiring a minimum 7-year term from the senior lender).(requiring a minimum 7-year term from the senior lender).

For commercial real estate financing, the term For commercial real estate financing, the term may be 10 years may be 10 years OROR 20 years 20 years

(requiring a minimum 10-year term from the senior lender).(requiring a minimum 10-year term from the senior lender).

Common 504 LoansCommon 504 Loans

51% Owner Occupied Commercial/industrial buildings51% Owner Occupied Commercial/industrial buildings Hotels/motelsHotels/motels Assisted living, personal care and nursing home Assisted living, personal care and nursing home

facilitiesfacilities Day care and child care facilitiesDay care and child care facilities Automobile and motorcycle dealershipsAutomobile and motorcycle dealerships Gas Stations/convenience storesGas Stations/convenience stores Fitness centersFitness centers RestaurantsRestaurants Agricultural ExpansionsAgricultural Expansions

A Typical 504 Project A Typical 504 Project Financing StructureFinancing Structure

50/40/10 = 90% Financing50/40/10 = 90% Financing::

50%50% Private sector loan Private sector loan40%40% 504 loan 504 loan10%10% Equity or subordinated debt* Equity or subordinated debt*

Seller Financing – 20yrsSeller Financing – 20yrsEconomic Development Financing – 15 yrsEconomic Development Financing – 15 yrs

Loan Structure for Start-up orLoan Structure for Start-up or Single Purpose Project Single Purpose Project

50/35/15 = 85% Financing50/35/15 = 85% Financing::

50% Private sector loan50% Private sector loan35% 504 loan35% 504 loan15% Equity or subordinated 15% Equity or subordinated

debtdebt

CombinationCombination “504” Loan Structure “504” Loan Structure

Combined Start-up Combined Start-up ANDAND Single Purpose Single Purpose project financing requires financing levels project financing requires financing levels of of 50/30/20 = 80% Financing50/30/20 = 80% Financing::

50% Private sector loan50% Private sector loan30% 504 loan30% 504 loan20% Equity or subordinated debt20% Equity or subordinated debt

504 Benefits504 Benefits

Borrower BenefitsBorrower Benefits90% + Financing90% + FinancingBank Loan/Direct Loan from SBA (2 loans)Bank Loan/Direct Loan from SBA (2 loans)Below Market Fixed Rates (SBA portion)Below Market Fixed Rates (SBA portion)Working Capital PreservationWorking Capital Preservation

Lender BenefitsLender BenefitsBlended Interest Rate offered BorrowerBlended Interest Rate offered Borrower50% Loan to Value50% Loan to Value CRA CreditsCRA Credits

Economic AdvantageEconomic Advantage

Bank Loan fixed for 5 years – 50% Bank Loan fixed for 5 years – 50% SBA Loan fixed for 20 years – 40%SBA Loan fixed for 20 years – 40%

50-100 basis points less than 5 –year rate50-100 basis points less than 5 –year rateBlended Rate = More Competitive Blended Rate = More Competitive

Proposal from 1 of 42 BanksProposal from 1 of 42 Banks

““504” Loan Terms: 504” Loan Terms: Rate of InterestRate of Interest

““504” loan rates are 504” loan rates are fixed for the life of fixed for the life of the loanthe loan and are determined one and are determined one week prior to the date of week prior to the date of debenture debenture fundingfunding

NoteNote: “Funding” occurs approximately : “Funding” occurs approximately 60 days after completion of a “504 60 days after completion of a “504 project.”project.”

““504” Loan Terms: 504” Loan Terms: Rate of InterestRate of Interest

DateDate 10-year 10-year TreasuryTreasury

SBA 20-yr SBA 20-yr

All-in-RateAll-in-Rate

Feb, 2006Feb, 2006 4.56%4.56% 6.53%6.53%

Jan, 2006Jan, 2006 4.37%4.37% 6.39%6.39%

Dec, 2005Dec, 2005 4.52%4.52% 6.38%6.38%

Nov,2005Nov,2005 4.57%4.57% 6.66%6.66%

Oct, 2005Oct, 2005 4.37%4.37% 6.38%6.38%

Sept, 2005Sept, 2005 4.06%4.06% 6.05%6.05%

““Blended” Blended” Rate of InterestRate of Interest

Lender RateLender Rate 6.5% SBA6.5% SBA

All-in-rateAll-in-rate

Blended RateBlended Rate

7.0%7.0% 6.5%6.5% 6.78%6.78%

7.25%7.25% 6.5%6.5% 6.92%6.92%

7.5%7.5% 6.5%6.5% 7.06%7.06%

7.75%7.75% 6.5%6.5% 7.20%7.20%

8.0%8.0% 6.5%6.5% 7.34%7.34%

Credit ConsiderationsCredit Considerations

50% Loan to Value50% Loan to ValueNo SBA Portfolio Reporting No SBA Portfolio Reporting

RequirementsRequirementsNo SBA DocumentationNo SBA Documentation

Third Party Lender AgreementThird Party Lender AgreementMinimum 7 or 10 year term commitmentMinimum 7 or 10 year term commitment

Eligible “504” Project CostsEligible “504” Project Costs

Land and building Land and building acquisitionsacquisitions

New constructionNew construction Building renovations/ Building renovations/

leasehold leasehold improvementsimprovements

Major machinery and Major machinery and equipment with a equipment with a minimum 10 year minimum 10 year economic lifeeconomic life

Related costs *Related costs *

Related costs include:Related costs include: Acquisition-related legal Acquisition-related legal

expensesexpenses Bridge loan points and Bridge loan points and

interestinterest Construction Construction

contingency up to 10%contingency up to 10% Professional feesProfessional fees Eligible soft costsEligible soft costs

Typically incurred within 9 months of application submission.

Eligible Project CostsEligible Project Costs

Purchase PricePurchase Price $1,000,000$1,000,000

Appraisal/EnvironmentalAppraisal/Environmental $4,000$4,000

Interim Loan InterestInterim Loan Interest $5,124$5,124

Bank Fee on Bridge Bank Fee on Bridge $4,100$4,100

Title InsuranceTitle Insurance $1,662$1,662

Transfer TaxTransfer Tax $10,000$10,000

Total Eligible Project Total Eligible Project $1,024,886$1,024,886

Bank Loan @ 50%Bank Loan @ 50% $512,443$512,443

SBA Loan @40%SBA Loan @40% $409,954$409,954

Equity @ 10%Equity @ 10% $102,489$102,489

““504” Debenture Fees504” Debenture Fees

2.50% up front “administrative costs” 2.50% up front “administrative costs” consisting ofconsisting of::

0.50% “User Fee” (guaranty fee paid to SBA)0.50% “User Fee” (guaranty fee paid to SBA) 1.50% “CDC Processing Fee” 1.50% “CDC Processing Fee”

(application fee paid to CDC)(application fee paid to CDC) 0.25%* “Funding Fee” (paid to Colson Services)0.25%* “Funding Fee” (paid to Colson Services) 0.25%* “Underwriters’ Fee” for 20-year debentures0.25%* “Underwriters’ Fee” for 20-year debentures

(0.375%for 10-year debentures)(0.375%for 10-year debentures)

• Plus up to 2,500 to cover CDC legal feesPlus up to 2,500 to cover CDC legal fees

504 Fee Summary504 Fee Summary

• 2.5% Capitalized Costs2.5% Capitalized Costs• Monthly Servicing Fees (included in the “All-in-Rate”Monthly Servicing Fees (included in the “All-in-Rate”• Third Party Lender Fee Third Party Lender Fee

• 0.05% of 10.05% of 1stst Mortgage (included in the bridge loan financing) Mortgage (included in the bridge loan financing)

Out of Pocket ExpensesOut of Pocket Expenses

• $1,500 Application Deposit$1,500 Application Deposit• RefundedRefunded

• Legal Costs Related to ClosingLegal Costs Related to Closing• Simultaneous ClosingSimultaneous Closing

• Life Insurance Costs (underwriting decision)Life Insurance Costs (underwriting decision)• Title InsuranceTitle Insurance

• One policy versus twoOne policy versus two

The “504” Loan ProcessThe “504” Loan Process

““504” Loan Process504” Loan Process

Call CDC/Seedco prior to Lender Call CDC/Seedco prior to Lender UnderwritingUnderwriting Determine EligibilityDetermine Eligibility Identify “Eligible Project Costs”Identify “Eligible Project Costs”

Joint Calls to BorrowerJoint Calls to Borrower Preliminary StagePreliminary Stage


Submit Bank Underwriting Documents to Submit Bank Underwriting Documents to Seed CoSeed Co Background on Borrower/Operating CompanyBackground on Borrower/Operating Company Historical Financial InformationHistorical Financial Information Project DetailsProject Details Projections (if applicable)Projections (if applicable)

Parallel UnderwritingParallel Underwriting Identify Closing Counsel and Title InsuranceIdentify Closing Counsel and Title Insurance


Bank Approval/SBA ApprovalBank Approval/SBA Approval Bank Closing/Simultaneous CDC Loan Bank Closing/Simultaneous CDC Loan

Closing (no construction)Closing (no construction) Construction Complete/ Certificate of Construction Complete/ Certificate of

Occupancy Received/CDC ClosingOccupancy Received/CDC Closing Debentures Sold and Bank RepaidDebentures Sold and Bank Repaid Bank Loan Servicing by BankBank Loan Servicing by Bank SBA Loan Servicing by CDCSBA Loan Servicing by CDC

ConsiderationsConsiderations

Turnaround time by the CDC is Turnaround time by the CDC is typically 30 days from the date of receipt typically 30 days from the date of receipt of a complete 504 loan applicationof a complete 504 loan application

20-year debentures are pooled and sold 20-year debentures are pooled and sold monthly; 10-year debentures are pooled monthly; 10-year debentures are pooled and sold every other monthand sold every other month

504 funding may NOT be subordinated 504 funding may NOT be subordinated to tax-exempt revenue bonds or to tax-exempt revenue bonds or mortgagesmortgages

504 Guaranty Requirements504 Guaranty Requirements

For EPC projects, small business must For EPC projects, small business must guaranty loan conceived guaranty loan conceived

As a rule, any officer, owner, or director As a rule, any officer, owner, or director who controls 20% or more of the stock of who controls 20% or more of the stock of the company will be required to guarantee the company will be required to guarantee the loanthe loan

SBA may require limited guaranty for SBA may require limited guaranty for anyone owning 5 % - 19% of the businessanyone owning 5 % - 19% of the business

504 Loan Program Issues -504 Loan Program Issues -BorrowerBorrower

Interest rate riskInterest rate risk between approval and fundingbetween approval and funding Prepayment premiumPrepayment premium Jobs requirementJobs requirement

Mitigating factorsMitigating factors: : (1) interest rates and “504” administrative loan fees have (1) interest rates and “504” administrative loan fees have

been steadily decreasing since May 2000; been steadily decreasing since May 2000; (2) prepayment premium is due only during the 1(2) prepayment premium is due only during the 1stst ½ of the ½ of the

504 loan term and steadily decreases to 0%; 504 loan term and steadily decreases to 0%; (3) job creation or retention requirement is only 1 (3) job creation or retention requirement is only 1

job/$50,000 of “504” loan and is waived for public policy job/$50,000 of “504” loan and is waived for public policy projects. No penalty for job creation shortfalls on an projects. No penalty for job creation shortfalls on an individual loan basis for established CDCs with a individual loan basis for established CDCs with a qualifying portfolio average.qualifying portfolio average.

SummarySummary

90%+ Financing90%+ Financing50% Loan to Value for Lender50% Loan to Value for Lender40% plus costs to SBA40% plus costs to SBA

Blended Below Marketing Interest Blended Below Marketing Interest RatesRates70-100 Basis Points Below Conventional 70-100 Basis Points Below Conventional

FinancingFinancing30 Day Turnaround for Approval30 Day Turnaround for Approval