The SBA 504 Loan Program. Financing the Owner Occupied Property

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1 The SBA 504 Loan Program Financing the Owner Occupied Property

2 SBA 504 Overview PURPOSE: provide FIXED RATE, long-term, below- market,, subordinated financing to owner- occupied small businesses promote and assist in the growth and development of small businesses benefit the local economy create jobs

3 Use of Proceeds Land, including site work and improvements Buildings including: purchase of existing building, new construction, renovation Machinery & Equipment with a minimum useful life of 10-years Debt Refinance permitted under circumstances permitted under limited

4 Benefits to Borrower of SBA 504 LOAN LOW DOWN PAYMENT-10% down LONGER TERM on all financing FIXED RATE (10 or 20 years) BELOW MARKET RATE on SBA portion SOFT COSTS FINANCEABLE saves cash for working capital SBA LOAN IS ASSUMABLE CONTROL over long term costs

5 BENEFITS TO ECONOMIC DEVELOPMENT FINANCE PROFESSIONALS Attract growing companies to your community with an attractive real estate financing package. Help conserve your local loan program funds for other purposes by using SBA 504 loans for qualifying projects. Fill your business parks and increase the local property tax base for projects that may not qualify for conventional financing. Businesses lower debt payments translate into savings for more employment opportunities.

6 BENEFITS TO THE BANKS PROTECTION SBA takes a 2 nd lien position LOWER LOAN-TO-VALUE RATIO -low 50% advance rate on commercial real estate loan LEND TO MARGINAL CREDITS with potential Community Reinvestment Act CREDITS ATTRACT GROWING COMPANIES gain deposit relationships

7 INTEREST RATES at all-time historic lows! As of December 16, year rate: 5.465% 10-year rate: 4.151% Note: Rates are approximate. Rates are set when the project is complete, all funds have been disbursed and lien waivers have been collected NOT at the time of loan approval.

8 Who is Eligible? $ For-profit business- Sole Proprietorship Partnership Corporation Limited Liability Company $ Owner-occupied company, at least 51% of useable space if existing building, 60% for new construction $ Create or retain 1 job for every $65,000 of SBA funds (if a manufacturing company, 1 job for every $100,000)

9 504 Funding Limits $1.5 million for standard loans $2 million for public policy goals including those promoting energy efficiency & green projects $4 million for manufacturer & certain green projects Down Payment 10% for existing businesses 5% additional for special purpose buildings 5% additional injection for start-up Note: Sweat Equity does NOT qualify

10 Case Study Total Project Acquisition of building $ 900,000 Renovations $ 350,000 Machinery $ 175,000 Soft costs $ 75,000 $1,500,000

11 Conventional Financing Bank 75% of project $1,125,000 Borrower Injection 25% $ 375,000 Total Project Cost $1,500, Year amort 20 Year amort 7% adjustable rate payment $ 13,062 $ 8,722 8% adjustable rate payment $ 13,649 $ 9,410 9% adjustable rate payment $ 14,251 $ 10,122 Note: Soft costs are typically out of an out of pocket expense. Banks will BALLOON their loan in 3 5 years!

12 SBA Financing Bank First Mortgage (50%) $ 750,000 SBA Second Mortgage (40%) $ 600,000 Equity Borrower Injection (10%) $ 150,000 Total $1,500,000 Payment 10 Year 20 Year Bank assume 7%, adjustable $ 8,708 $ 5,815 SBA- fixed rate 20 yr at 5.5%. $ 4,127 $ 4,127 Total Payment SBA and Bank $12,835 $ 9,942 Note: Soft costs CAN be financed. Bank must offer 10-year term without any Balloon payments

13 Life Insurance Co. Financing Life Insurance 65% LTV $ 812,500 (Real estate ONLY) Borrower s s Cash Injection (35% ) $ 437,500 (Real Estate portion ONLY) TOTAL Real Estate Project $1,250,000 Borrower s s Payment at 7% fixed rate $ 6, year term on $812,500 Plus: Borrower s s out-of of-pocket equity for equipment and soft costs $ 250,000 which cannot be financed

14 Approval Process Credit is reviewed and approved by the Bank Credit is reviewed and approved by CDC Company at same time and submitted to SBA SBA approval takes approximately business days for written approval.

15 Loan Fees & Soft Costs The bank charges normal, reasonable fees on its loan SBA fees average less than 1.75% of the SBA loan (until( Stimulus funds expire) Soft costs and SBA fees may be financed and generally do not have to be supported by the appraised value

16 PREPAYMENT PENALTY Based on Debenture 5.00% rate (not Effective Rate) 4.50% 4.00% Half the term of the 3.50% loan 3.00% 2.50% Sliding, decreasing 2.00% penalty 1.50% 1.00% Penalty cannot be 0.50% 0.00% waived! Penalty - Year #1 Penalty - Year #7 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

17 Loan Closing TWO Closings with independent documents: Bank closes the total financing package and funds the construction phase with a construction note TWO BANK NOTES 1. Permanent loan for 50% of the project 2. Interim Note for 40% of the project ONE SBA NOTE SPEDCO closes SBA loan for 40% of the project. SBA sells debenture (bond) to pay-off the bank s s interim note

18 STIMULUS PACKAGE CHANGES Temporary elimination of fees for the SBA 504 loan program (extended by Obama Administration through February 2010, or until $125 million in subsidies are used up) SBA will no longer require a bank participation fee (currently.5% of the bank's permanent mortgage) The CDC loan origination processing fee of 1.5% formerly paid by the borrower is now paid by SBA.

19 STIMULUS PACKAGE CHANGES Job Creation Ratio Change: The job creation requirement has been permanently been changed to one job per $65,000 of SBA loan funds received.

20 STIMULUS PACKAGE CHANGES Debt Refinance rules rules permitted under limited circumstances has been permanently changed to the following: (A) The new loan involves business expansion (B) Collateralized by fixed assets (C) Existing debt incurred for benefit of small business (D) Proceeds used to acquire land, to construct or expand building or to purchase equipment (E) Borrower is current on all payments of existing debt for one year (F) New financing will provide better terms or interest rate (G) New financing will be used only for refinancing existing debt, or for costs related to project being financed.

21 Energy Efficient Public Policy Goals Projects that meet one of the following new energy goals are eligible for SBA 504 loans for between $2-4 million without needing to create or retain jobs: 1. Reduction of energy consumption by at least 10% (Qualifies for $4 million) 2. Increased use of sustainable designs that reduce the use of greenhouse gas and non-renewable resources and minimize harmful environmental impact. (Qualifies for $2 million) 3. Install equipment and/or upgrades that will process renewable energy sources. (Qualifies for $4 million)

22 The Broker/Developer s s Role Ask what amount of cash the borrower wishes to put into the project. If the answer is as little as possible and the building is owner occupied Suggest an SBA 504 loan. The broker can put the borrower in touch with a CDC company such as SPEDCO. The Broker becomes the HERO.

23 SPEDCO RESOURCES Our staff is here to support Borrowers in Minnesota and Western Wisconsin every step of the way! Andy Clausen, Steve Wertz, Russ Knighton, Tom DeLong, Sandy Pryor, Cherrie Rose, Sarah Bock, Mary Beth Watkins and Kristin Wood Open 7:00 a.m. 6:00 p.m (toll free: SPEDCO) or