The SBA 504 Loan Program

Revised by SEED Corp. 4/15

www.seedcorp.com

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What is the SBA 504 Loan Program? It is the Small Business Administration’s “economic development financing program.”

Loans are provided to expanding small businesses to aid in job creation.

SBA loans are guaranteed by the Federal Government.

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General understanding of the SBA 504 Loan Program from origination to servicing, and

504 Program Features & Benefits

Goal of Presentation

Visit: www.sba.gov/for-lenders

For Forms, Regulations and

Standard Operating Procedure Manuals

The Role of SEED Corporation

The SBA 504 Program is administered through SBA Certified Development Companies (CDC’s) like SEED Corporation.

SEED underwrites, packages, closes and services SBA 504 loans.

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Selling the 504 Option

If the answer to any of the following questions is yes, then give the customer an introductionto SBA 504.

Is working capital important to the success of the business?

Is a long-term fixed rate important for cash flow? Is a low down payment important? Does the business want protection in the event

of a devaluation of real estate?

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Benefits to the Borrower Up to 90% financing for a fixed asset project.

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

The SEED effective rate as of 3/15 is 4.8% on a 20-yr debenture, and 4% on a 10-yr debenture.

Ability to include soft costs, equipment and furniture and fixtures. . .enabling business to minimize out of pocket expenses and preserve cash.

Lower down payment conserves working capital.

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Bank’s maximum loan-to-value is typically 50%, minimizing risk and improving liquidity.

Ability to finance projects with as little as 10% injection.

Program allows reliance on financial projections for startups and businesses with inadequate historic cash flow.

The bank’s first mortgage can be sold in the secondary market for a premium.

The CDC is responsible for all of the paperwork!

Benefits to the Bank

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What’s needed for SEED to approve a 504 request?

Purchase & sales agreement for project property and cost estimate for construction/renovation projects.

Three years of tax returns and financial statements for the business.

Information on the borrower’s existing debt.

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What’s needed for SEED to approve a 504 request?

Current personal financial statement and 2 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!

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Use of FundsFixed-Asset Acquisition or Expansion:

Purchase land & construct new buildings. Purchase and/or renovate existing buildings. Construct an addition to an existing building. Refinance existing eligible fixed asset debt up to 50% of new expansion project; including an existing SBA 504 loan Acquire/install machinery & equipment. Construct or remodel buildings on leased land. Soft costs related to the project (appraisal, environmental assessment, interim interest, and professional fees).

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Use of Funds (Cont.)

Ineligible use of funds:

Debt refinancing (if there is no expansion) Purchase of trucks, autos and airplanes Working Capital Franchise fees Management fees and advertising Incorporation / organization costs

Contact SEED at (508) 822-1020 for Loan Structure!

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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.

Minimum Amount of 504 Loan: $25,000*

There is no maximum limit to project size.

Project Size Requirements

* SEED Calculates costs and benefits for 504 projects under $300,000 and may use other program funds.

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Job Requirements

Provide one job for every $65,000 funded(SBA 504 Portion)

Exceptions: Manufacturing businesses provide one job for every $100,000 funded (SBA 504 portion).

Projects that meet any of the SBA Public Policy Goals or Community Development Goals.

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Public Policy GoalsNot Required to Create one 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. Aiding rural development. Energy-consumption reduction of at least 10% or sustainable design or equipment and process upgrades.

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Public Policy Goals (Cont.)

Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports). 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).

Not Required to Create one job for each $65,000

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Community Development Goals

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.

Not Required to Create one job for each $65,000

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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 (exception for some producer coops)

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Not Eligible for 504 Funding (Cont.)

Political or lobbying services. Businesses located in a foreign country or owned by a non-resident alien. Businesses selling through pyramid plans. 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.

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Typical Structure for Established Business

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Typical Structure for a Special Purpose Building OR Start-Up

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Typical Structure for Start-Up Business AND Special Purpose Building

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Structure of a Typical $1 Million Project

Loan % of Entity Amount Project Security

Lender $500,000 50% 1st Mortgage

SEED/SBA 504 $400,000* 40% 2nd Mortgage

Borrower $100,000 10%**

TOTAL: $1,000,000 100%

*Total Debenture: $411,000 ($400 back to client) (Up front fees include 2.65% on $400,000)

**Projects that involve a new business and/or special purpose buildingwill require additional 5-10% from the borrower.

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Eligible Project Costs:Land $ 200,000Construction 600,000Contingency (10%) 60,000Site Preparation 10,000Machinery/Equipment 50,000Furniture/Fixtures 20,000

Soft Costs ~ Permits 2,500Architect/Engineer 25,000Appraisal 4,000Environmental Report 2,500Title Insurance 1,000Interim Interest & Fee 25,000

TOTAL $1,000,000

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

100% $1,000,000

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Fees Charged by CDC

Financed as part of 504 loan – 2.65% of net debenture

CDC Processing Fee (SEED): 1.50%

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

Funding Fee: 0.25%Paid to Central Servicing Agent (Wells Fargo).

SBA Guaranty Fee: 0.50%

Total: 2.65%

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Program Requirements

Existing Building: Business must occupy at least 51%.

- may lease out up to 49%

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

Occupancy

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Ownership of Building

By the Operating Company (OC).

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

Ownership need not be identical

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Guarantees

Required for any principal with 20% ownership or more in Operating Company (OC) or Eligible Passive Company (EPC).

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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 yrs)

~ or ~

Use 7A size standards as an alternative.There is no limitation on annual sales volume

* Size standards are increased by 25% in labor surplus areas.

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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 loans over $1,000,000, the appraiser must be state certified.

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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 (land, building, equipment and business).

When collateral is special purpose, the appraiser must be experienced in the particular industry

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Appraisals (Cont.)

An appraisal must be submitted with application if relying on owner’s equity for injection.

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Environmental ReportsQuestionnaire 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 & Records Search with Risk Assessment is necessary.

Environmental Reports (Cont.)

Environmental Questionnaire & Records Search with Risk Assessment

Unlikely there is environmental contamination. Risk Assessment states “Low Risk”. If “Elevated Risk” or “High Risk” ~

Phase I required.

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Environmental Reports (Cont.)

TSA Required (Transactional Screening Analysis)

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Environmental Professional must conclude that no further investigation is warranted (Reliance Letter required).

If opinion warrants further investigation, a Phase I must be obtained.

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.

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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 project.

CDC will determine whether disbursement is appropriate according to subparagraph G, Pages 323-326 of SBA SOP 50 10 5(G).

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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 e-mail). 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.

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The 504 “Process” SEED is an Abridged Submission Method (ASM) lender, and submits required forms to SBA plus:

• Purchase & Sale Agreement• Construction Cost Estimates• 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.

Potential process delays: Franchise reviews; 912 criminal clearances; INS (Immigration) confirmations and gasoline jobber agreement reviews. *Current processing time due to SBA staffing – 7-10 business days.

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The 504 “Process”

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).

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Bank’s Permanent 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, and can be fixed or float.

Bank can charge points.

The SBA charges a one-time bank participation fee of 0.5% on the bank’s first mortgage.

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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 disbursements and supervises construction.

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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

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Loan Rates

Debenture Rate

Note Rate

Effective Rate

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Debenture Rate

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

Paid to bond investors on semi-annual basis.

Negotiated by Underwriters, DCFC & the U.S. Government

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Note Rate

Rate stated on the note between borrower & CDC.

Amount used in calculating monthly payments.

Slightly higher than debenture rate as it is paid on a monthly basis rather than semi-annually.

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Effective Rate

Rate the borrower actually pays

Note rate (as of 3/15 Sale): 2.766% Plus Fees: Annual Central Servicing Agent Fee 0.100% CDC Servicing Fee (SEED .875 + SBA .125) 1.000% SBA Fee 0.937%

Total Fees 2.037%

SEED’s Effective Rate (As of 3/15) 4.803% SBA Required Servicing Fee - This fee can go up to 1.5%. CDC’s

Servicing Fees vary and impact the client’s effective rate!

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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.

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Funding the 504 LoanWhen 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.

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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.

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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.

Please Note: It can take up to 3 months to fund the 504 Debenture once project is completed

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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.

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Prepayment First Half of 20 year Debenture

Prepayment EstimateBased on March 2015 Funding

Year % % of Principal Outstanding1 100% 102.77%2 90% 102.49%3 80% 102.21%4 70% 101.94%5 60% 101.66%6 50% 101.38%7 40% 101.11%8 30% 100.83%9 20% 100.55%

10 10% 100.28%After 10 0% 100.00%

Prepayment is based on the note rate plus principal in year one and 10% less each year thereafter.

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Personnel Company – Acquisition of Existing Building

Purchase of Land & Building $925,000Improvements 148,000Soft Costs 27,000

$1,100,000

Bank (50%) $550,000

SBA 504 (40%) $440,000Client (10%) $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.

Project Profile: 10% Down Payment (Standard)

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Purchase of Existing Restaurant (New Owner)Considered new operation:

Building Purchase Price $1,200,000

Bank (50%) 600,000

SBA 504 (35%) 420,000Client (15%) 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 transaction.

Project Profile: 15% Down Payment (New Owner)

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Acquisition of a Special Purpose Bldg – Gas Station

Building Purchase Price $675,000

Bank (50%) 337,500SBA 504 (35%) 236,250Client (15%) 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.

Project Profile: 15% Down Payment (Special Purpose)

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Start-Up HotelPurchase of Land $1,500,000Building Construction 5,000,000FF & E 950,000Professional Fees 70,000Contingencies/Interim Interest 380,000 $7,900,000Bank (50%) 3,950,000SBA 504 (30%) 2,370,000Client (20%) 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 furniture, fixtures & equipment).

Project Profile: 20% Down Payment(Special Purpose and New Owner)

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Why YOU Should Consider a SEED/SBA 504 Loan

Up to 90% financing for fixed asset project.

Lower down payment for client.

Long-term, fixed rates for 10 or 20 years.

SEED provides quick & efficient turn around(SBA approved for Abridged Submission).

SEED provides loans up to $200,000 at 5% fixed to replace the down payment.

SEED is responsible for all the paperwork.

Call (508) 822-1020 or Visit www.seedcorp.com