LENDERS SUMMARY OF 504 RULES

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1 LENDERS SUMMARY OF 504 RULES Eligibility applies to Nine areas 1. Size 2. Credit Not Available Elsewhere 3. Personal Resources of the Borrower 4. Use of Proceeds 5. Types of Businesses 6. Job Criteria(Economic Development Criteria) 7. Occupancy 8. Loan Amounts 9. Minimum Terms 1. Size The business must be "small" as defined in the SBA code Size Standards For Operating Company and Passive Company and Affiliates Tangible Net Worth (after taxes) $15 million or less Profits after tax (average last two years) $5 million or less If neither of the above then 7a standards for small business annual sales or number of employees based on the NAICS code If in Labor Surplus Area Tangible Net Worth and Profit after tax may be increased by 25% $18,.75 million and $6.25 million respectively 2. Credit Not Available Elsewhere Businesses whose desired credit is not available on reasonable terms from Non-Federal sources (Banks, etc.) Credit Available Elsewhere test Lender is not able to offer financing without the participation of the Small Business Administration 504 Loan Program due to, but not limited to, any one of the following: 1. The business needs a longer maturity than the lender s policy permits 2. The collateral does not meet the lender s policy requirements; Uniqueness or value of the available collateral is unacceptable to the Lender without SBA participation 3.Risk associated with the nature of the business exceeds Lender s normal credit policy 4. Lender s liquidity is insufficient without the proceeds of a secondary market sale of the loan, which sale is made possible by the participation of the SBA 5. The requested loan exceeds either the lender s legal lending limit or policy limit regarding the amount that it can lend to one customer; 6. The lender s policy normally does not allow loans to new businesses or businesses in the applicant s industry 1

2 3. Personal Resources of the Borrower Eligible Borrowers for a 504 loan Must Meet the Personal Resources Test Applies to 20% or more ownership, only computed for each owner NOT cumulative (Husband and wife are considered one owner) The owner may have liquid assets no greater than the following: If Total Financing Package is $250,000 or less The greater of $100,000 or 2 x The Total Financing Package $250,000 through $500,000 The greater of $500,000 or 1.5 x The Total Financing Package $500,001 or greater The greater of $750,000 or 1 x The Total Financing Package Total Financing Package including : 1 st mortgage, Gross debenture, borrower equity, any subordinated financing, working capital, equipment, furniture and fixtures, refinancing of first mortgage Liquid Assets include: 1. Cash 2. Marketable Securities 3. Savings, CD's, Money Market Accounts 4. Publicly traded stocks, bonds 5. Cash surrender value of unencumbered life insurance Liquid assets in excess of the above amounts are to be injected into the project as owner equity 4. Use of Proceeds Eligible Use of Proceeds 1. Purchase of new land and/or building 2. New construction or renovation 3. Purchase of machinery and equipment 4. Leasehold Improvements and furniture and fixtures 5. Certain soft costs related to the project. a. Legal expenditures for zoning changes b. title searches, insurance c. recording fees d. engineering and architectural fees e. appraisal fees f. environmental costs g. interest and points on interim construction loan h. impact and permit fees and utility hook-up fees 6. Contingency reserve of 10% of construction cost 7. All eligible project costs within nine months of application to SBA 8. Refinancing or Restructuring debt* Refinancing is permitted in certain circumstances up to 50% of the new project money for expansion projects. The loan must have been for eligible uses under the 504 program up to 85% of the refinance The appraisal determines the available refinance amount. Cannot be more than 90% of appraisal The new appraisal cannot be more than six months old. There can be cash out on the refinance for up to 90% of the appraised value for future business expenses. The loan must have originated greater than two years before the date of application The loan must have been current for the last twelve months. Refinance cannot be for any government debt or the first in a 504 transaction Loan Guarantee Fee is 1.043% If the project does not meet job creation or public policy goals then the 504 loan size is limited to Full time employees times $65,000 2

3 Ineligible use of proceeds 1. Working Capital 2. Accounts Receivable 3. Inventory 4. Machinery, Equipment, Furniture, Fixtures with useful life less than 10 years unless minor part ( usually less than 25%) of the total project cost and essential to the business. 5. Points on the First (3 rd Party Loan) Points only allowed on the interim loan. 5. Types of Businesses For Profit operating businesses are eligible such as: Hotels, Motels, Trailer Parks(R.V. Parks), campgrounds Self Storage facilities Residential Care Facilities such as nursing homes Equipment rental businesses Antique Malls, Office Suites, Marinas, equestrian centers Independent Contractor agents of insurance companies Retail operations Manufacturing operations Service Operations Wholesale Operations Ineligible Business for a 504 Loan Non-Profit Businesses Businesses Engaged In Lending Passive Holder of Real or Personal Property Life Insurance Companies Businesses located in a foreign country Alien owned businesses Businesses selling through a pyramid plan Businesses engaged in gambling Illegal Businesses Businesses Which Restrict Patronage Government owned entities Businesses Engaged in Promoting Religion Consumer and Marketing Cooperatives Businesses Engaged in Loan Packaging Businesses Owned by Persons of Poor Character Businesses Providing Prurient Sexual Material Businesses with Prior Loss to the Government Political or Lobbying Activities 6. Job Criteria (Economic Development Criteria) Economic Development Criteria The Loan must have a job opportunity average of 1 Job Opportunity created or retained for every: a. $65,000 lent (CDC Portion) b. $75,000 lent (CDC portion) to Projects located in Special Geographic Areas (Alaska, Hawaii, State-designated enterprise zones, empowerment zones, enterprise communities, and labor surplus areas) A CDC may choose to separate these loans from the remainder of its portfolio for the purpose of calculating the averages. (c) $100,000 lent (CDC portion) to Small Manufacturers NAICS codes 31,32,33 If Project does not meet above criteria then will be eligible if meet one of either Public Policy Goal or Community Development Goals. 3

4 Public Policy Goals 1. Business District Revitalization 2. Expansion of Exports 3. Expansion of minority business development 0-Black (African) 1-Puerto Rican 2-American Indian 3-Hispanic 4-Asian or Pacific Islander (China,India,Korea, the Phillipines, Samoa) 5-Eskimo and Aleuts 6-Multi Groups comprising 51% or greater ownership 7. Women owned businesses 4. Rural development 5. Enhanced Economic Competition 6. Business restructuring resulting from federally mandated standards or policies 7. Assisting businesses affected by federal budget reductions 8. Veteran ownership 9. Women owned business 10. Reduction of energy consumption by at least 10% 11. Increased use of sustainable design, including designs that reduce the use of greenhouse gas emitting fossil fuels, or low-impact design to produce buildings that reduce the use of non-renewable resources and minimize environmental impact 12. Plant, equipment, and process upgrades of renewable energy sources such as small scale production of energy for individual buildings or communities consumption, commonly known as micro power or renewable fuels producers including biodiesel and ethanol producers. 13. Reduction of rates of unemployment in labor surplus areas. Community Development Goals 1. Improve, diversify, stabilize a local community's economy 2. Stimulate other Business Development 3. Bring a new income into the community 4. Assist Manufacturers (SIC codes 20-49) 5. Assist Businesses in labor surplus areas 7. Occupancy Requirements For purchase or renovation of existing Buildings Business must occupy at least 51% of building space No 504 funds may be used to finish the space being leased out to tenants other than owners For new construction and occupancy Immediately occupy 60% of building Lease out long term 20% Occupy remaining 20% beginning within three years ending ten years 8. Loan Amounts Please Note That There is NO Project Maximum. The maximum loan amount only applies to the SBA guaranteed portion. 504 Maximum Loan Amount - Gross Debenture (per borrower) May not exceed 40% of eligible project cost and $5,000,000 Maximum (CDC portion) Manufacturing (maximum per project not per borrower) $5,500,000 Maximum (CDC portion) NAICS codes 31,32,33 Job Criteria is One job for every $100,000 guaranteed by SBA 4

5 Energy Projects (maximum per project not per borrower) $5,500,000 Maximum (CDC portion) (Items 10 and 12 of the public policy goals) 1. Project that reduces the borrower s energy consumption by at least 10% 2. Project that generates renewable energy or renewable fuels, such as biodiesel or ethanol products. Please note that Public Policy 11. Increase sustainable design was not included in the per project limits And remains a per borrower limit, and it did also not increase to $5,500,000, and remains at $5,000,000 Minimum Loan Amount $50,000. District office may approve down to $25,000 in $1,000 increments 9. Minimum Terms There is a minimum term required by the Bank portion of the loan. For a 10 year CDC debenture the bank minimum is at seven years, For a 20 year CDC debenture the bank minimum is at ten years 5

6 Program Details Structure of loans and down payment Private Sector first mortgage 50% (Bank Loan Typically) SBA 504 Net Debenture Proceeds 40% (CDC Loan debenture guaranteed by SBA) Borrower Down payment 10% Single use building down payment add 5% 50/35/15 New business (two years or less) add 5% 50/35/15 Both add 10%..50/30/20 Restaurants are no longer considered special purpose buildings and do not require an additional 5% down. Interest rate 10 year loan is based on the five year treasury 20 year loan is based on the 10 year treasury Spread over the treasury has ranged from ½ a point to a full point historically. Rate is determined one week prior to funding Interest rate fixed for term of the loan on CDC portion of the loan. Rate including fees for April 2013 is 4.29% Personal Guarantees Personal guarantees of anyone owning 20% or more of operating company Or owners of 20% or more of Eligible Passive Concern no exceptions Prepayment Penalty There is no partial pay down of principle allowed on the CDC 2 nd portion of the loan. Third Party Lenders may allow partial pay downs of principal. The prepayment penalty for the CDC portion of the loan is computed on the 100% of the Debenture rate times the loan principle balance for the 1 st year. The debenture rate for February 2012 is 2.63% For a 20 year loan, penalty declines by 10% each year No prepayment penalty after ten years For a 10 year loan, penalty declines by 20% each year No prepayment penalty after five years There is no requirement for a prepayment penalty on the Third Party Lender 1 st. Prepayment penalties on the 1 st vary from lender to lender. Primary Approval Criteria U.S. Citizen or Green Card Not on probation No previous felony conviction No previous default on any government loan where the government took a loss. Credit History of timely payments Adequate cash flow from operations to pay debt Adequate working Capital Sufficient Collateral Payments Payments are made automatically to Wells Fargo(SBA s Depository agent) through an ACH on the first business day of the month. The CDC retains servicing of the loan for its entire term. Assumability The 504 portion of the loan is assumable with a one point fee by qualified borrowers. 6

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