The SBA 504 Certified Development Company Loan Program

Transcription

1 The SBA 504 Certified Development Company Loan Program Presented by: Carolyn Engel Cynthia Esterling Great Lakes Asset Corporation Jason Monnett Today s Agenda Basics: Benefits, Eligibility & Credit Financing Structure 3. Rate History & Program Fees 4. Approval Process 5. Closing / Funding Process 6. Comparison 504 vs. 7(a) 7. Case Studies / Examples Overview of the SBA 504 Loan Program The 504 loan program was established to help businesses purchase or expand commercial real estate and acquire equipment while preserving working capital. A 504 loan reduces the risk to lenders through its structure as second mortgage financing. 3 1

2 Overview of the SBA 504 Loan Program Government guaranteed debenture: Administered by SBA through CDC s Provides fixed-rate financing for fixed asset purchases or construction Requires reduced equity injection from borrower Promotes new jobs and/or saves existing jobs Stimulates private sector investment 4 Why SBA 504? 5 Benefits of the 504 Program Bank s Perspective Help customers access 20-year fixed-rates 6 Able to provide financing when down payment is limited Improve bank s collateral position and lower bank s loanto-value percentage. CDC / SBA are in a subordinate lien position with bank, not pro-rata Enhance market perception -- can do attitude and not competing simply on rate Increased lending capacity, especially for community banks 2

3 Benefits of the 504 Program Customer s Perspective 7 Major Borrower benefits of the 504 program are: Lower down payment required Access to longer maturities/commitments Access to long-term, fixed rates Assumable Debenture Benefit to Borrowers 8 SBA 504 Eligible Use of Funds Land, Buildings, and Equipment Project Related Eligible Soft Costs 9 Professional Fees, including appraisals and environmental reports Interim Interest Refinance w/ Expansion Up to 50% of expansion costs Note: We can now look back indefinitely in time to capture eligible 504 project costs provided the interim loan has not begun amortizing Refinance of existing lender debt into a 504-more information to come Ineligible 504 Project Costs Working Capital, Inventory, and Other Current Assets Goodwill and Other Intangible Assets 3

4 Examples of Typical 504 Projects 10 Manufacturing Facilities & Equipment Medical, Dental, & Veterinary Clinics Hotels/Motels & Restaurants Community-Based Residential Facilities & Daycare Sales & Service Convenience Stores & Storage Facilities Retail Stores Non-Eligible 504 Projects loan program not intended for developers: Apartment Buildings Office complexes Strip malls SBA 504 Prospects 12 Companies experiencing growth Start-up businesses Businesses wanting to move from leasing to owning Businesses opening another location 4

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6 SBA 504 Eligibility 16 Must be small per SBA Size Standards; may use 504 & 7(a) size standards interchangeably: 504 Tangible Net Worth Cannot Exceed $15MM and 2-year Average Net Income Cannot Exceed $5MM (includes affiliated businesses). 7(a) Sales / Employment Limit Depending on NAICS Code. Owner-occupied real estate Personal Liquid Asset Test no Longer Applies Occupancy Rules For New Construction 60% must be occupied by the Operating Company (OC) at all times 20% can be leased short term, with the OC planning to occupy this space within three years 20% can be leased long term 17 For Existing Real Estate 51% must be occupied by the OC at all times 49% can be leased long term Occupancy Rules - Change in Definition of Rentable Property 18 Rentable Property is the total square footage of all buildings or facilities used for business operations (13 CFR ) excluding vertical penetrations (stairways, elevators, and mechanical areas that are designed to transfer people or services vertically between floors), and including common areas (lobbies, passageways, vestibules, and bathrooms). Rentable property may include exterior space (except parking areas) that is actively used in Borrower s business operations. Examples of exterior space that is actively used in Borrower s business operations include: outdoor storage yards for general contractors, trucking companies, moving and storage companies; or boat slips and docks for marinas. Lender must document in its loan file the basis for determining that the exterior space is actively used in Borrower s business operations. 6

7 Typical 504 Finance Structure New Business/Special Purpose Rules New Business: Business that is 2-years old or less at time of application Change of Ownership likely considered a new business because: It will result in new, unproven ownership / management Increased debt unrelated to business operations (Goodwill) Special Purpose Properties SBA provided a list in SOP: Common Examples: Gas stations, service centers, car wash properties Medical facilities, nursing homes & assisted living facilities Hotels & motels, wineries, museums Farms including dairy facilities NOTE: Restaurants, Daycares & Self Storage Facilities are not considered Special Purpose Properties New Business/Special Purpose Structures 21 Under these situations, the Third Party Lender must be at 50% participation 7

8 504 Debenture Size 22 $5 million limit in all eligible cases $5.5 million per project for eligible small manufacturers NAICS starting w/ 31, 32, or 33 Must create/retain one job per $100,000 in SBA financing $5.5 million per project for projects That reduce energy consumption by at least 10% For plant, equipment and process upgrades of Renewable energy sources (micropower) or Renewable fuel producers (biodiesel and ethanol) Borrower s Contribution Cash Equity Injection/Owner s Cash Cash from Operations Interim Interest Down Payments related to eligible project costs Proceeds of a Seller or Municipal Loan or TIF Borrowed funds secured by project assets must have the same term as the 504 debenture: Municipal loans with favorable terms may be granted an exception to the same term rule mentioned directly above If unsecured, no min. term or percentage of project requirement Equity in Real Estate As Is Appraised value less debt against RE 23 Terms Year Debenture (Real Estate) Bank loan must have a minimum maturity of 10 years Combined real estate & equipment projects (mixed-use) are possible based on concentration 10-Year Debenture (Equipment) Bank Loan must have a minimum maturity of 7 years Equipment term may be 20 years based on useful life 8

9 Credit Underwriting CDC s and SBA emphasize management & cash flow in underwriting. We recognize that 504 projects are leveraged & that the CDC/SBA portion is undersecured. 25 Unlike the 7(a) program, we are not required to take all available business & personal collateral available if under-secured based on project assets. Collateral 26 SBA 504 Fixed Interest Rate History & Program Fees 27 9

10 SBA 504 Fixed Interest Rates 20 Year Debenture: 10-Year Treasury at the time of sale + Spread (12-month average is 2.66%) 10 Year Debenture: 5-Year Treasury at the time of sale + Spread (12-month average is 2.71%) Current Effective 504 Fixed Interest Rates: 20 Year 4.31% (April 2016) 10 Year 4.33% (March 2016) Interest Rate History 29 Average 20 Year Effective Rate 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% Fee s 30 Origination Fees of 2.15% are added to the SBA 504 portion of the project Attorney Closing fee of $2,500 is also added to the SBA 504 loan Servicing fees of 1.639% are added to the principal & interest and part of the payment Lender fee of.50% is paid on the bank portion one time 10

11 SBA 504 Approval Process Approval Process Bank Approval CDC Approval CDC Internal Underwriting may include: Credit Scoring / Management Approval Loan Committee Application Submitted via E504 Turnaround Time of 3-5 Business Days Can receive approval subject to a clean environmental & acceptable appraisal SBA Approval 3-4 Weeks with a Complete Application Package 32 SBA 504 Approval Process Items to be addressed early on: Offers to Purchase & Allocation of Assets Reliable Estimate of Project Costs Current & Complete Construction Contracts Appraisal As Is and As Complete List CDC, SBA, and Lender on appraisal Appraised Value at least 90% of cost Post Construction Appraisal Recertification stating facility was built as originally appraised 33 11

12 Other Potential Issues & How To Avoid Them Program Franchise, Supplier & Dealer Agreements. SBA Form 912 affirmative Borrower Responses. Environmental Reports Equipment bids & estimates. Debt Refinance: sufficient documentation for 85% use of proceeds? Proof of Borrowers Contribution Adverse Change 34 SBA 504 Funding Process 35 SBA 504 Funding Timeline: days from the completion of the project 36 Documents drafted by CDC Attorney: ~2 weeks Copy of all docs sent to Borrower for review Preclosing Closing Meeting: Meeting March 1 Recording Phase: 3-4 SBA Reviews weeks (avg.) Docs & Forwards to Wells Fargo in NY ~2 Weeks SBA Submission: April 1st Wells Fargo pools all Bonds for open market sale ~2 Weeks May 5: Rate Sets Bond Sale May 13: Debenture Proceeds wired to Bank to pay down Interim June 1 st: First P & I Payment on SBA 504 Note Review Authorization Confirm Actual Costs match Authorization Sign SBA Loan & Security Docs Must have no exceptions including Final Title Policy Separate Notes (1) Permanent Note- Bank (2) SBA 504 Note No principal on Bank loan until now Monies on Deposit w/ CDC refunded approximately June 15th 12

13 Comparison 504 vs. 7(a) 37 Comparison vs. 7(a) 38 Benefits of 504: Benefits of 7(a): Lower fees (as % of project) Wider range of eligible use of Competitive, long-term fixed rates proceeds; not limited to fixed Lender has superior lien position over assets SBA; lower risk for loan loss Lender controls/establishes loan More Borrower friendly (personal) closing date collateral requirements Lender retains higher loan CDC/SBA responsible for loan liquidation activities balances on its books Lender has the ability to sell 1 st Ability to generate fee income mortgage from sale of guaranteed portion of Flexibility in seller financing structure loan Lender s 1 st mortgage not subject to Borrower makes single monthly SBA Annual Servicing Fee loan payment to Lender No monthly 1502 reporting for Lender s exposure is protected by Lender SBA guaranty at all times; no Higher SBA program limits for interim financing risk manufacturers (NAICS 31, 32, 33) 4.20% 4.05% 3.90% 3.75% 3.60% 3.45% 3.30% 3.15% 3.00% 2.85% 2.70% 2.55% 2.40% 2.25% Fee % 2.10% 1.95% 1.80% 1.65% 1.50% 1.35% 1.20% 1.05% 0.90% 0.75% 0.60% 0.45% 0.30% 0.15% 0.00% Comparison of 504 vs. 7(a) Origination Fees Based on Total Project Amount 90% Financing 39 Break-Even at $272M $100 $300 $500 $700 $900 $1,100$1,300$1,500$1,700$1,900$2,100$2,300$2,500$2,700$2,900 Project Amount (000's Omitted) 504 7(a) 13

14 Is Wisconsin an Average (2%) State? Wisconsin s Percentage of the U.S. Total: 40 SBA 504 as a Credit Structuring Differentiator 41 SBA Loan Programs Conventional Financing Alternate Financing Sources (RLF, TIF, Etc.) Credit solutions containing SBA solutions are an excellent way to differentiate your institution from your competitors! 42 14

15 Scenario: Structuring Options - Example An experienced manufacturer has approached your SBA participating lending institution requesting a financing proposal to fund their second location due to growth. 43 Preliminary Request: Land - $400M Construction Bid - $2.0MM Contingency & Soft Costs - $100M Structuring Options 44 Conventional SBA 7(a) SBA Year Term 20 Year Term TPL Front-end Loan: 10 Year Term 504 Debenture: 20 Year Term 20 Year Amortization 20 Year Amortization TPL Front-end Loan: 20 Year Amortization 504 Debenture: 20 Year Amortization 20% Down Payment Requirement Pricing: Prime %; Adjusted As & When 10% Down Payment Requirement Pricing: Prime %; Adjusted Annually Down Payment Requirement: 10% combined for TPL Front-end & 504 Debenture Pricing: TPL Front-end Loan: Prime % Floating; Adjusted As & When 504 Debenture: 20 Year Fixed Rate sets when Bond sells days after project completion (4.310% for 04/2016) Structuring Options Conventional SBA 7(a) SBA 504 $2.5MM Project $2.5MM Project $2.5MM Project Equity $500M Lender $2MM Equity $250M Lender $2.25MM Equity $250M CDC $1MM Lender $1.25MM 45 15

16 Structuring Options Fees Conventional Conventional fees vary widely by lending institution SBA 7(a) Origination Fees: SBA 7(a) Sources of Funds: Bank Loan - 75% gtd* $2,312, % Borrower Contribution $250, % Total $2,562, % Total 7a Fees: $62, % for loans over $1MM; 3.75% on guaranteed portion over $1MM *Assumes the Gty. Fee is Financed Servicing Fees 0.519% of the guaranteed portion of the outstanding balance (cannot be passed on to the borrower directly) SBA 504 Origination Fees: Debenture Pricing: Net Debenture Amount $1,000, DCFC Funding Fee $2, CDC Processing Fee $15, SBA Reserve Fee $5, Bond Counsel Fee $2, Underwriting Fee $4, Total $1,029, Gross Debenture Amount $1,030, * Amount paid back over 20 years Other Fees: Bank 1/2% Fee $6, Total 504 Fees: $35, Servicing Fees Approx % of the outstanding principal balance (Included in Fixed Rate) 46 Structuring Options Estimated Mo. Payments Conventional Structure: Current/Proposed Debt Schedule Amount Amortization Interest Rate PMT Lender $2,000, % (P %) $13,758 Total Monthly Payment $13,758 SBA 7(a) Structure: Current/Proposed Debt Schedule Amount Amortization Interest Rate PMT Lender $2,312, % (P %) $16,568 Total Monthly Payment $16,568 Note: Would qualify for a 25 Year 7(a) Loan, which would reduce the monthly payment to $14,900 / month SBA 504 Structure: Current/Proposed Debt Schedule Amount Amortization Interest Rate PMT Lender $1,250, % (P %) $8,599 CDC $1,030, % $6,542 Total Monthly Payment $15, Years in the Future Prime Increases to 5% Conventional Structure: Current/Proposed Debt Schedule Amount Amortization Interest Rate PMT Lender $2,000, % (5% %) $15,808 Total Monthly Payment $15,808 SBA 7(a) Structure: Current/Proposed Debt Schedule Amount Amortization Interest Rate PMT $2,312, % (5% %) $18,985 Lender Total Monthly Payment $18,985 $2,050 / Month or a 14.9% Increase $2,417 / month or a 14.6% Increase SBA 504 Structure: Current/Proposed Debt Schedule Amount Amortization Interest Rate PMT Lender $1,250, % (5% %) $9,880 CDC $1,030, % $6,542 Total Monthly Payment $16,422 $1,282 / Month or a 8.5% Increase 48 16

17 Loss Example Same Structure As Before Conventional $2.5MM Project SBA 7(a) SBA 504 $2.5MM Project $2.5MM Project Equity $500M Lender $2MM Equity $250M Lender $2.25MM Equity $250M CDC $1MM Lender $1.25MM 49 Loss Example 3 Years Later Business Fails Conventional Market Value $2,500,000 Recovery Value $1,500,000 Principal Balance Year 3 -$1,820,749 Lender's Loss -$320,749 SBA 7(a) SBA 504 Market Value $2,500,000 Market Value $2,500,000 Recovery Value* $1,500,000 Principal Balance Year 3 -$2,110,517 Recovery Value* $1,500,000 Loss -$610,517 Loss shared on a pro rata basis TPL Loan - Principal Bal. with the SBA; calculation below: Year 3 -$1,137,968 Lender's Loss $0 Lender's Portion - 25% -$152,629 SBA's Portion- 75% -$457,888 Remaining Recovery Value Combined Loss -$610,517 ($1.5MM - $1.14MM) $362,032 SBA 504 Loan - Principal Bal. Year 3 -$928,383 SBA's Loss -$566,351 *Assumes a 60% Collateral Recovery Rate 50 SBA 504 Case Studies 51 THREE SCENARIOS: 1. BUSINESS PURCHASE 2. EQUIPMENT 3. EXPANSION WITH REFINANCE 17

18 Case Study #1 Purchase 52 Background: ABC Veterinary Hospital was established in They are being acquired by a relatively new Veterinary Clinic which shares leased space with them. The seller of ABC Veterinary Hospital is retiring and lost interest in growing the business, which has led to sales declines over the past few years. The buyers do not have adequate cash reserves to acquire the business with conventional financing and need to reserve their limited cash for business growth. However, the business acquisition offers the buyers a significant potential for growth with added services and existing customers in the same market. Case Study #1 Purchase Transaction Details: The project involves a business purchase which includes real estate and business acquisition. The buyers have been sharing leased space with the business being purchased. The acquisition will allow a relatively new veterinary clinic to expand to 24 hour emergency care for animals. The buyer s clinic is only one year old but has a strong balance sheet and experienced management. The business being purchased is well established but has a declining sales and profit trend over the last few years. The seller is willing to provide financing on very favorable terms to help facilitate the overall transaction. 53 Case Study #1 Purchase 54 Preliminary Overall Project Cost Summary: Purchase of Real Estate -$1,000,000 Acquisition of Stock - $500, Eligible Costs: Purchase of Real Estate - $1,000, Ineligible Costs: Acquisition of Stock - $500,000 18

19 Case Study #1 Purchase Addressing the Credit: 55 Buyer has experienced management but a relatively short history of successfully managing the veterinary clinic. During that year, the company has been profitable with positive cash flow. Acquiring the veterinary hospital offers risk with the change in ownership, but more so offers opportunity for the buyer to expand their services and acquire an existing customer base. Transaction leverage reduced via seller financing. Project property is not considered special-purpose, but because the buyer has been in business only one year, it may be considered a new business with a 15% borrower contribution is required A 3 rd party business valuation was completed and supports the stock purchase/sba 7(a) loan request. Seller provided a 20-year, unsecured note on favorable terms, to serve as the buyer s borrower contribution into the 504 real estate transaction. Case Study #1 Purchase 504 Project Structure: 56 Uses Amount Sources Amount Percent Purchase Building $1,000,000 Bank $500, % CDC/SBA $350, % Borrower (Seller) $150, % Total $1,000,000 Total $1,000, % Overall Sources & Uses: Source of Funds Use of Funds Debenture 1 st Mtg. Loan SBA 7a Seller Financing Standby 2 years Seller Financing Total Purchase of Real Estate $362,000* $500,000 $150,000 $1,000,000 Stock Redemption $400,000 $100,000 $500,000 Total $362,000 $500,000 $400,000 $100,000 $150,000 $1,500,000 * Includes capitalized SBA 504 fees. Case Study #1 Purchase 57 Benefits to the Borrower: Lower down payment (15%) than conventional financing/ability to qualify seller financing as borrower contribution. 20-year fixed rate on 35% of the financing. Benefits to the Third Party Lender: 1 st lien on the project real estate which resulted in a 50% LTV. Ability to get a deal done for a buyer than had experience, but limited personal liquidity. 19

20 Case Study #2 Equipment 58 Background: Beer Brewing Company is a longestablished Wisconsin based micro brewery. Continued growth and expanded customer demand in other geographic regions has led to a need for additional equipment for expansion purposes. Case Study #2 Equipment 59 Credit / Special Considerations: This is an established business with an experienced and deep management team. Based on cost, there is a significant collateral shortfall on the 504 debenture (using a 50% advance ratio). The borrowers wish to minimize their down payment in order to help fund their strong growth. Case Study #2 Equipment 60 Preliminary Overall Project Cost Summary: Equipment $1,750,000 Installation $ 50, Eligible Costs: Equipment $1,750,000 Installation $ 50,000 20

21 Case Study #2 Equipment 61 Addressing the Credit / Special Considerations: Established business with the ability to service proforma debt. Equipment is never considered a special purpose thus a borrower contribution of 10%. In the 504 program SBA does not require that additional collateral be taken to address any collateral shortfall. Life insurance on owner(s) was required due to the significant collateral shortfall. Case Study #2 Equipment 504 Project Structure: 62 Uses Amount Sources Amount Percent Purchase Equipment $1,750,000 Bank $900, % Installation of Equipment $ 50,000 CDC/SBA $720, % Borrower $180, % Total $1,800,000 Total $1,800, % Case Study #2 Equipment 63 Benefits to the Borrower: Lower down payment (10%) than conventional financing. 10-year fixed rate on 40% of the financing. Benefits to the Third Party Lender: 1 st lien on the project equipment which resulted in a 50% LTV. For this project, the lender was able to use CDC/SBA as a subordinate participant reducing their total outstanding loans for lending-limit / credit concentration purposes which would have occurred due to other holdings/loans with the ownership team. 21

22 Case Study #3 Expansion w/ Refinance 64 Background: Pearly Whites is a dentistry offering a wide range of dental services. Owner and dentist Gloria will use the financing to construct a new building and purchase equipment, as well as refinance her existing debt of $142,600. This debt is from a previous loan to purchase equipment. Case Study #3 Expansion w/ Refinance 65 Credit / Special Considerations: The constructed building will not be a special use property. The personal debt ratio is on the high side, in large part due to Gloria's student loans. All personal obligations are service by her husband s salary. There is a collateral shortfall and increased leverage. This is an established business with an experienced manager / dentist. Life & disability insurance coverage should be reviewed & verified. This expansion will lead to new revenue opportunities as the new facility will be in a superior location. The land was acquired approximately 1 year ago in preparation for the project. A refinance request is part of the project. May be able to utilize 504 permanent refinance feature. Case Study #3 Expansion w/ Refinance 66 Preliminary Overall Project Cost Summary: Refinance $142,600 Construction $752,971 Equipment $377, Eligible Costs: Land $310,000 Construction $752,971 Equipment $377, Potentially Eligible 504 Costs: Refinance $142,600 22

23 Case Study #3 Expansion w/ Refinance 67 Addressing the Credit / Special Considerations: Established business and the project property is considered multi-purpose thus a 10% borrower contribution. Land was acquired within past two years; therefore, 504 rules require that cost, and not appraisal, is used to determine value. Must prove out original use of proceeds for loan to be refinanced. 85% or more must have been used for fixed assets/504 eligible purposes. SBA & CDC have a very good track record with this industry. Disability Insurance coverage was verified. Assignment of Life Insurance for amount of collateral shortfall was required. Case Study #3 Expansion w/ Refinance 504 Project Structure: 68 Uses Amount Sources Amount Percent Purchase Land $310,000 Bank $800, % Construction Costs $752,971 CDC/SBA $640, % Purchase/Install Equipment $377,243 Borrower $160, % PayOutstanding Debt $142,463 Soft Costs, Interim Interest $17,323 Total $1,600,000 Total $1,600, % Case Study #3 Expansion w/ Refinance 69 Benefits to the Borrower: Lower down payment (10%) than conventional financing. 20-year fixed rate on 40% of the financing. Benefits to the Third Party Lender: 1 st lien on the project real estate which resulted in a 50% LTV. Ability to get a deal done for a buyer that had experience, but limited personal liquidity. 23

24 Take-A-Ways Fixed asset project over $272,000??? Think 504 Tapped out on 7(a) availability? 504 can help Attractive Long Term Rates: 20 year debenture rates: 10 year treasury + ~2.66% 10 year debenture rates: 5 year treasury + ~2.71% Get your CDC involved early in the process 70 Presenter Contact Information Cynthia Esterling Executive Director Great Lakes Asset Corporation cesterling@greatlakesasset.com 200 S. Washington St., Suite 202 Green Bay, WI Fax Jason Monnett, Vice President & Senior Lender Wisconsin Business Development Finance Corporation jmonnett@wbd.org 2390 State Highway 44, Suite C Oshkosh WI Fax: Carolyn Engel, Business Finance Manager Business Lending Partners carolyn@blp504.org 2320 Renaissance Blvd Sturtevant, WI Fax Thank You! 72 PLEASE COMPLETE AN EVALUATION FORM 24