SBA 504 Loans An Important Economic Development Tool for Community Lenders

Transcription

1 SBA 504 Loans An Important Economic Development Tool for Community Lenders A vital source of financing for your business customers NADCO

2 Presenters today Mindy Murray RMI, Jefferson City, MO Mike Vanchiere Mountain West Small Business Finance, Salt Lake City, UT Ken Rosenthal CDC Small Business Finance, San Diego, CA Q & A Moderator--Zola Finch, RMI, Jefferson City, MO 2

3 Purpose of web conference What is the 504 Loan Program? What customers are eligible for 504 financing? What is the 504 Loan process? Why would I offer the 504 Loan Program to my customers? Myth vs. Fact Question & Answer 3

4 7(a) the other SBA Program Provides financing for businesses through a bank The SBA guaranty facilitates the extension of credit Usually utilized for lines of credit and working capital financing May be used as a companion loan with 504 Loan 4

5 What is the 504 Loan Program? Economic development financing tool Delivered/administered by CDCs 504 project has three main partners, generally 504 project involves fixed asset financing to for-profit businesses 5

6 What customers are eligible for 504 financing? 6 Business customers that are for-profit Applicant must use the project property Cannot finance assets for passive income except in the EPC/OC situation. Located in the United States or its territories Defined as small by SBA definition: Tangible net worth of $8.5 million or less; and Average net income after Federal taxes of $3 million or less for the preceding two fiscal years

7 What customers are eligible for 504 financing? (cont.) Operating company must occupy 51% of an existing building or 60% of a new building Demonstrate a need for the 504 Loan by applying the Credit Elsewhere Test and Personal Resource Test Meet an economic development objective of the 504 program job creation/retention. 7

8 What customers are eligible for 504 financing? (cont.) Businesses that currently own land and are ready to construct their building Now leasing with an option to purchase the property Currently own their facility and time to remodel, renovate and/or expand Ready to purchase land and construct a building Want to move and purchase an existing building Expanding into new markets and want to add an additional site 8

9 How much financing can the 504 Program provide? 504 Loan Maximum 504 Loan amount Standard 504 Loan Maximum $1.5 million Meets 1 of 14 Public Policy Goals unless also meets Energy goals Maximum Maximum $2.0 million $4.0 million Manufacturer Maximum $4.0 million 9

10 What is the 504 Loan process? Contact the CDC Structure the financing with the three partners Third Party Lender, CDC, business applicant Typical structure 50/40/10 50% financing provided by Third party Lender of eligible 504 project costs 40% financing provided by CDC 10% down payment provided by business applicant 10

11 What is the 504 loan process (cont.) Alternate structure 50/35/15 required for new businesses or limited or special purpose property 50% financing provided by Third Party Lender of eligible 504 project costs 35% financing provided by CDC 15% down payment provided by business applicant 11

12 What is the 504 Loan process? (cont.) Alternate structure 50/30/20 required for BOTH new businesses AND limited or special purpose property 50% financing provided by Third Party Lender of eligible 504 project costs 30% financing provided by CDC 20% down payment provided by business applicant 12

13 What is the 504 Loan process? (cont.) Project Example: Total Project Cost $2,500,000 50% Third Party Lender Loan $1,250,000 40% 504 Loan (net of fees) $1,000,000 10% Borrower Downpayment $ 250,000 Total Sources of Funds $2,500,000 13

14 What is the 504 Loan process? (cont.) Project Example (cont.) Calculation of Fee(s) and Savings with ARRA Third Party Lender Loan $1,250,000 X.005 = $6,250 CDC Processing Fee $1,000,000 X.015 = $15,000 Total Fee Savings $21,250 14

15 What is the 504 Loan process? (cont.) Third Party Lender Loan 15 50% permanent loan Must be for a term of at least 7 or 10 years, depending on the length of the 504 Loan. Third Party Lender receives 1 st lien position on assets financed Interest rate charged must be legal and reasonable Must not have any cross-default or cross-collateral feature(s) Third Party Lender also provides a bridge (interim) loan for the net 504 Loan amount.

16 What is the 504 Loan process? (cont.) Loan (CDC loan) Funded through the sale of a debenture fully guaranteed by SBA Either a 10 or 20 year fully amortized note Subordinate position on assets financed Fixed interest rate for the full term of the loan Collateral usually limited to the assets financed Take-out financing pays off the bridge (interim) loan provided by the Third Party Lender

17 What is the 504 Loan process? (cont.) Down payment by business applicant Borrower must inject at least 10% of the 504 project cost (usually cash) Alternate down payment: The borrower s equity in land/building that will be part of the 504 Project. In some cases, applicant s down payment may be borrowed 17

18 What is the 504 Loan process? (cont.) Borrower completes 504 application and submits to the CDC CDC performs underwriting/credit review CDC submits application to SBA for approval Authorization and Debenture Guaranty issued by SBA upon approval. 18

19 What is the 504 Loan process? (cont.) Third Party Lender performs their loan closing and advances both permanent amount and interim loan amount (net 504 Loan) Upon project completion, CDC performs loan closing for 504 Loan. 19

20 What is the 504 Loan process? (cont.) 504 Loan closing documentation forwarded for legal review 504 Loan (debenture) is pooled with other 504 Loans Net debenture proceeds (504 Loan) are wired to the Third Party Lender to payoff interim loan. 20

21 What is the 504 Loan process? (cont.) Borrower makes payments on two loans: Third Party Lender loan and 504 Loan. CDC services the 504 loan while the Third Party Lender services their permanent loan. 21

22 Why would I offer the 504 Loan Program to my customer(s)? Advantages for the Third Party Lender 50% Loan to Value First lien position on assets being financed Greater portfolio diversity and credit risk management Ability to compete in the market place 22

23 Why would I offer the 504 Loan Program to my customer(s)? (cont.) Improved capital performance measures CRA Credit Balance sheet management 504 projects can be managed so that the take-out financing occurs before the closing of major reporting periods Pricing and structure requirements can be achieved in advance with an eye toward selling the Third Party Lender loan to the secondary market 23

24 Why would I offer the 504 Loan Program to my customer(s)? (cont.) Advantages to your customer Low down payment Low, fixed interest rate Preservation of borrower s working capital Fully amortizing, long term loan (10 or 20 years) 24

25 Why would I offer the 504 Loan Program to my customer(s)? (cont.) In economic downturn, may be the only option Interest rate of bank financing may be more favorable due to the Third Party Lender s low LTV Can finance closing and other soft costs Collateral usually limited to assets being financed 25

26 Why would I offer the 504 Loan Program to my customer(s)? (cont.) Advantages to the community JOBS JOBS JOBS Capital investment increases tax base Stimulates other development Expanded access to capital 26

27 What documents are required in a 504 Loan application? 27 Similar information as provided for the Third Party Lender loan Historical Financial Statements Personal Financial Statement(s) Tax Returns Business projections Appraisal Environmental assessment Commitment letter from Third Party Lender

28 New for 504 Loan Program: Debt Refinancing 504 projects may include a limited amount of debt refinancing. If the project involves expansion, any amount of the existing debt that does not exceed 50% of the cost of the expansion may be refinanced. 28

29 Myth vs. Fact about SBA 504 Financing This is not your father s SBA. --Phil Lader SBA Administrator

30 Myth: SBA loans take way too long. Fact: From the time a completed 504 Loan application is received by the CDC and submitted to SBA for approval, the process usually takes three to five working days. 30

31 Myth: SBA loans have too much paperwork. Fact: Much of the paperwork for a 504 Loan is the same as the paperwork provided to the Third Party Lender. Copies are shared between the Third Party Lender and the CDC. 31

32 Myth: SBA loans are last resort financing. Fact: The 504 Loan Program is designed for expansion of healthy, credit-worthy businesses. However, the 504 Loan Program may also be used for start-up businesses. 32

33 Myth: SBA Loans have too many fees. Fact: Fees for the 504 loan are as follows: *CDC processing fee 1.5% *Bank Fee.5% (amount of Third Party Lender Loan) *Currently paid under ARRA Cost to the borrower: $0 33

34 Myth: SBA Loans have too many fees. (cont.) Funding Fee.25% Underwriting Fee.40% Total.65%* *included in the 504 loan amount May also add closing costs in the 504 Loan up to $2500 which are amortized over the life of the loan. 34

35 Myth: SBA Loan interest rates are too high. Fact: In recent years, 504 Loan interest rates have been at market rate or below. Note: 504 Loans (40% of the financing package) have fixed interest rates which help provide an excellent blended interest rate with the Third Party Lender loan (50% of the financing package). 35

36 Myth: SBA means lots of regulations I have to remember. Fact: The borrower and Third Party Lender don t have to remember all the rules. Call your CDC expert who knows the details of the 504 Loan Program. 36

37 504 Loans: Let out the well-kept secret! Winner! Third Party Lender Winner! Small Business Winner! Community 37

38 Question & Answer Presenter: Mindy Murray, RMI Presenter: Mike Vanchiere, Mountain West Small Business Finance Presenter: Ken Rosenthal, CDC Small Business Finance Q & A Moderator: Zola Finch, RMI 38

39 Become an Affiliate Member of NADCO and receive 504 Loan/CDC industry information fast! Broadcast delivery of urgent program updates Substantial discounts on NADCO professional 504 training and meeting registration Monthly delivery of NADCO s Certified News Access to members only section of NADCO website To become an affiliate member, or call Merril Ferber merril@nadco.org (p)

40 National Association of Development Companies (NADCO) 6764 Old McLean Village Drive McLean, VA Phone: Fax: Website: 40

41 Conclusion Thank you for your participation If you need to find a local CDC, visit Please complete and submit your evaluation form at the end of this Web Conference 41