Making QLICIs under $5 Million work LISC small business loan fund. January 2012

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1 Making QLICIs under $5 Million work LISC small business loan fund January 2012

2 LISC/Morgan Stanley Small Business Loan Fund The goal of the fund is to provide low-cost, long-term financing to small businesses that enable job creation in neighborhoods that align with LISC s Sustainable Communities strategy NMTC subsidy utilized to provide favorable rates and terms to small businesses creating jobs in distressed communities where LISC works Community impact goals for the fund align with LISC s NMTC Program criteria: Eligible NMTC census tracts w/ high distress criteria Focus on job creation Demonstrated support of the local community Contribution to the long-term development of a sustainable community Demonstrated need for NMTC subsidy $10 Million pilot program to be expanded if successful 1

3 SBA 504 Program Overview The CDC/504 loan program is a long-term financing tool, designed to encourage economic development within a community. The 504 Program accomplishes this by providing small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization. Typically, a CDC/504 project includes: A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the project cost A contribution from the borrower of at least 10 percent of the project cost (equity) Proceeds from 504 loans must be used for fixed asset projects, such as: The purchase of land, including existing buildings The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping Modernizing, renovating or converting existing facilities The 504 Program cannot be used for working capital or inventory 2

4 Advantages of SBA 504 over conventional loans Lower down payment the business owner pays only 10% down, borrowing up to 90% of the total financing needs, thus preserving cash for the business. Longer repayment terms SBA repayment periods are longer than conventional bank loans 20 years fully amortized for real estate loans and 10 years fully amortized for equipment loans. The borrower s monthly loan payment is more affordable, improving cash flow. Below-market, fixed interest rate. Projected income consideration SBA lenders consider projected income of a business in addition to historical cash flows. This is particularly advantageous for growing businesses. Secondary source of payment less critical With the SBA-504 loan guarantee, collateral may be less critical in qualifying a borrower for a loan. 3

5 Role of Certified Development Companies A Certified Development Company (CDC) is a private, nonprofit corporation which is set up to contribute to economic development within its community. CDCs work with SBA and private sector lenders to provide financing to small businesses, which accomplishes the goal of community economic development. The 2 nd mortgage or junior lien on all SBA 504 loans must be originated and serviced by a CDC to meet SBA requirements for their guarantee There are about 270 CDCs nationwide, each covering a specific geographic area CDC Partners for this fund may include: CDC Small Business: Bay Area, Los Angeles, San Diego, Phoenix Cambridge Capital: Indianapolis SomerCor 504: Chicago Wisconsin Business Development: Milwaukee Michigan CDC: Detroit New York Business Development Corporation: New York City 4

6 Borrower Eligibility To qualify for a SBA-504 loan, a business must: Be owner-operated and for-profit Be organized as a sole proprietorship, corporation, partnership or limitedliability corporation (LLC) Tangible business net worth (including affiliates) not to exceed $15 million. Average net income of the business not to exceed $5 million over the previous two years. Loan Program Requirements 51% owner occupancy for existing building 60% owner occupancy for new construction 5

7 Owner Equity 2nd Mortgage 1st Mortgage Capital Stack of SBA Financing 1 st Mortgage Loan of up to 50% of costs is funded from Small Business Loan Fund and receives the NMTC subsidy 2 nd Mortgage of up to 40% of costs is an SBA guaranteed loan Owners Equity of 10% is required for SBA financing 0 Capital Stack 6

8 LISC/Morgan Stanley Loan Fund Terms Loan size: $2.5 Million maximum 1 st mortgage ($4.5 Million total financing including 2 nd mortgage) $250,000 minimum 1 st mortgage Rate: Currently 3.96% fixed for seven years (as of 1/10/12) Based on 5 year swap rate Adjusts to quarterly adjusting rate after seven years Based on 90 day LIBOR Term: 30 year term 3 year interest only, then 27 year amortization schedule 7

9 Loan Fund Comparison to SBA 504 Market Market NMTC Structure Maximum 1 st Mortgage $2,000,000 $2,500,000 Interest Rate 6.00% 3.97% Term Amortization 25 3 year I/O, then 27 DSCR 1.2:1 1.0:1.0 Borrower FICO Score Origination Fee 1% 0.5% LTV at Inception 50% 60% Legal Closing Costs $2,500 $2,500 Our Small Business Fund offers significant cash flow savings to small businesses in low-income areas: $1 Million 1 st mortgage loan example: -$37K in cash flow benefit over SBA 504 market rate loan in 1 st year -$178K in cash flow benefit over 7 years 8

10 NMTC Structure Morgan Stanley loan and equity investment into the investment fund $10 Million investment into Sub-CDE Expect to make 9-10 QLICIs with $1 Million average loan size Loans to small businesses have fixed subsidized rate for seven years, then convert to a market rate loan based on 90 day LIBOR Borrower pre-payment penalty to mitigate re-investment risk 9

11 Example Loan Large dental practice in a LISC sustainable communities neighborhood in Milwaukee $1.9 Million facility purchase 1 st mortgage 50% $950,000 MS lender of record Small business fund purchases the loan and holds for seven years Annual debt service $96K for years 1 3 $135,000 in incremental cash flow savings to business in 1 st 3 years 2 nd mortgage 40% $760,000 Bridge loan from local bank Take out from SBA debenture 70 jobs retained + 10 new jobs created Sponsor Contribution 10% $190,000 borrower contribution 10

12 Small QLICI takeaways Need strong partners Equity and debt from same institution Previous experience with the asset class Willingness to utilize NMTC equity as a loan loss reserve Need plan to reduce transaction costs Form QLICI loan agreements Low cost tax opinions or agreed upon procedures Limited use of outside counsel required for individual QLICI loan closings Patience required Took a full year to develop the program 11

13 NMSC Contacts Kevin Boes, President & CEO Bob Poznanski, SVP & COO Matt Huber, SVP & CFO Steve Petsos, VP Business Development