The SBA 504 Program: Details, Benefits, Challenges and How to Get Involved

Transcription

1 The SBA 504 Program: Details, Benefits, Challenges and How to Get Involved January 29, 2015 Mark Abell, SVP & SBA Division Manager Vectra Bank Colorado

2 What do you picture when you hear Small Business?

3

4

5 What do you picture when you hear SBA Loan?

6

7

8

9

10 Taking the Myth out of the SBA 504 Program Overview of SBA 504 Program The Benefits of the SBA 504 Program The Challenges of the SBA 504 Program How to Get Started

11 SBA 504 Program Basics

12 SBA 504 Program Permanent Financing For: Owner Occupied Real Estate Capital Equipment

13 SBA 504 Definitions EPC Eligible Passive Company formed to hold the real estate or asset (generally an LLC) OC Operating Company Third Party Lender the bank providing the first lien that s you Certified Development Company or CDC the non-profit participant that arranges SBA s approval and closes the bond financing documents Net Debenture the 30% to 40% funded by the bank and paid off by the SBA s bond. Gross Debenture the actual amount of the SBA bond. Equal to the Net Debenture plus SBA fees.

14 504 Program Financing Structure 50% Bank (1 st Lien) 30-40% SBA Debenture/Bond (2 nd Lien) 80-90% Loan-to-Cost/Loan-to-Value Program 10-20% Borrower Equity

15 504 Program Financing Structure Bank funds both loans: 1 st Lien - minimum term 10 years 2 nd Lien generally days until SBA Debenture is sold in the Capital Markets SBA will sell the Debenture to include additional SBA fees and costs Roughly equal to 2.65% of the Net Debenture or 2 nd Lien loan

16 SBA s Portion: Loan Structures 20 year debenture Real Estate Sold once each month 10 year debenture Real Estate or Equipment Sold in Odd-Numbered Months

17 504 Program Fee Structure The CDC Charges a Third Party Lender Participation Fee of ½% on the BANK portion It is up to you to include this in the fees you collect, but you will have to pay it to the CDC The SBA adds a complex set of fees to the Net Debenture and sells the bond for the total Generally about 2.65% of the Net Debenture Amount, plus $2,500 legal document preparation

18 SBA 504 Maximum Loan Size Bank Portion has no limit, but most banks will not fund more than 50%-55% of the project value SBA s Portion Maximums $5,000,000 Most Borrowers $5,500,000 Manufacturers or Projects that include Small Scale Production of Energy (Solar/Geothermal) It is a loan to cost program well, sort of

19 SBA 504 Maximum Project Size Calculation if Bank Portion Caps at 50% 90% Financing: 50% Bank / 40% SBA / 10% Borrower $5,000,000/40% = $12,500,000 $5,500,000/40% = $13,750,000 80% Financing: $5,000,000/30% = $16,666,667 $5,500,000/30% = $18,333,333

20 504 Program Bank Benefits Attract/Retain Borrowers with: Lower Down Payment 10% for existing business buying equipment or multipurpose real estate. Add 5% each (or more) for start-ups or single-purpose. May be used to offset cost v. value gaps Reduced Interest Rate Risk for the Borrower and Bank Low, Long-Term Fixed Rates from SBA on their portion Current Rates: 20 year = 4.601% / 10 year = 4.416% Interest Rates on the bank portion are up to you. You set the index, spread, and tenor, provided they are reasonable.

21 504 Program Bank Benefits First Mortgage at 50% LTV very low risk of loss in liquidation Not necessarily true for single purpose real estate businesses like Hotels and Gas Stations May help you provide larger loans than you would otherwise offer Because of lower loss given default, your capital allocation is generally lower if it gets adversely graded (after SBA funds)

22 504 Program Structural Challenges SBA Portion has: All or nothing prepayment Note: Bank portion can be prepaid SBA Portion is assumable and will subordinate to new 1 st lien Prepayment Penalty 1 st 10 years (currently about 3.5% yr 1) Higher Fees than Conventional (Mostly Financed) This is the offset for that low down payment and low, longterm fixed rate

23 504 Program Bank Challenges SBA issues an Authorization that dictates the terms you MUST follow to get their loan funded For construction loans, you are at risk that the borrower could have a material adverse change before SBA closes You have a Reg H Supervisory LTV exception, unless you take extra collateral during the construction and/or interim loan period

24 504 Program Bank Challenges This is NOT a guaranteed loan program when you record it on your books. You don t have guaranteed program carve-outs like you do with the 7a program. SBA has some VERY detailed rules you must follow which can get complex if your borrower: Has multiple affiliated businesses or operates a franchise, licensee, or dealership-type business Will form an EPC to own the real estate

25 504 Program Requirements SBA has some unique requirements surrounding: Equity Injection Eligible Project Costs Self-Managed Construction Owners, Managers and Directors with Criminal Histories Non-US Citizen Borrowers Guarantees and Life Insurance Eligible Passive Companies Leases with Operating Company Owner Occupancy Tests Creating Jobs or Meeting Public Policy Loan Goals

26 Applicant For-Profit Business Small Business Not Passive or Lender Located in US Demonstrate Need Adequate Management Experience Adequate Equity/Cash Flow Eligibility Basics

27 Eligibility Basics Owners Good Character Use of Funds - Not for Ineligible Purpose Not for purchase of Investments Rental Real Estate/Fix n Flips Not for working capital or reimbursing a borrower s equity injection

28 How to Be Successful Start with Training through a CDC Get the CDC Loan Officer involved early in meeting with your client and calling with you to help guide the process Disclose everything you have on your borrower and their affiliated businesses Don t start with construction loans. Get comfortable by closing purchase transactions and work with the CDC to close their documents at your loan closing. Set reasonable expectations with your borrower

29 CDC Contact Information All Operate Statewide CEDCO Small Business Finance (Denver, Grand Jct, Pagosa) Bill Bacon, Director Colorado Lending Source (Denver, Glenwood Spgs) Mike O Donnell, Director Pikes Peak Regional Development (Colorado Springs) Doug Adams, Director Preferred Lending Partners (Denver) Stephanie Gerringer, Director Southern Colorado Economic Development Corp (Pueblo) Edith McClish, Deputy Director

30 Questions