How To Help A Small Business Fund Fund

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1 LISC Small Business Lending Update PRESENTED BY: Kevin Boes New Markets Support Company Kelsey Hamory New Markets Support Company

2 Small Business Lending Products LISC/NMSC have developed a toolkit of products and services to support small businesses in pursuit of our Building Sustainable Communities goal of Stimulating Economic Development. Two of these products are managed by NMSC: 2 LISC/Morgan Stanley Small Business Loan Fund Provide SBA 504 first-mortgage loans in LISC communities. $10 million NMTC fund closed in September SBA Community Advantage (CA) License LISC applied to the SBA for a CA license in September CA license will allow LISC to provide acquisition, equipment and working capital loans up to $250,000, which are backed by an SBA guarantee.

3 LISC/Morgan Stanley Small Business Loan Fund

4 LISC Small Business Loan Fund Overview Goal: Provide low-cost, long-term SBA 504 financing to small businesses that enable job creation in neighborhoods that align with LISC s BSC strategy. LISC Partners: Morgan Stanley provide debt and NMTC equity capital for 1 st mortgage loans CDC Small Business Finance nation s largest SBA 504 lender CDC Capital Markets wholly-owned subsidiary of CDC Small Business Finance. Due diligence provider for Morgan Stanley for the marketing, packaging, underwriting and servicing. Local Bank Partners loan referrals and interim 2 nd mortgages Local 504 Companies underwrite and service 2 nd mortgage 4

5 LISC Small Business Loan Fund Overview Community impact goals for Small Business Loan 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 fund closed in September 2012 As of October 2013, four projects financed utilizing $2.6 million: Specialized Services (Phoenix) Dental Associates (Milwaukee) Inpac Container (Los Angeles) Foundry Building (Indianapolis) Two projects approved ($2 million) Two projects in underwriting ($2.2 million) $3 million remaining 3

6 Morgan Stanley 6 Morgan Stanley (NYSE: MS) is a leading global financial services firm providing a wide range of investment banking, securities, and investment management services. The Firm's employees serve clients worldwide including corporations, governments, institutions and individuals from more than 1,300 offices in 42 countries. Since 2006, Morgan Stanley has executed more than $3.6 billion in investments to strengthen underserved communities. Morgan Stanley provided $10 million in debt and NMTC equity to capitalized the Small Business Loan Fund.

7 CDC Small Business Finance Celebrating 34 years in operation Corporate headquarters in San Diego 7 Retail Offices in California, Arizona & Nevada Largest CDC in the USA CDC Capital Markets wholly-owned subsidiary of CDC Small Business Finance. Provides due diligence for SBA 504 first mortgage secondary market solutions.

8 Local 504 Companies (CDCs) A Certified Development Company (CDC) is a private, nonprofit corporation set up to contribute to economic development within its community. CDCs work with the 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 8

9 What is an SBA 504 loan? Owner-user fixed asset financing 9 Commercial real estate Business equipment Cannot be used for working capital or inventory 90% fixed rate financing 50% 1 st Mortgage 40% CDC Debenture 2 nd Mortgage 10% Borrower Down payment Economic development tool designed to create jobs

10 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 and affiliates combined net worth (including affiliates) not to exceed $15 million. Average after-tax net income of the business and affiliates not to exceed $5 million for the previous two years. Loan Program Requirements 51% owner occupancy for existing building 60% owner occupancy for new construction LISC/Morgan Stanley Small Business Loan Fund Specific Requirements Multi-purpose - office, warehouse, light industrial, retail, manufacturing, medical or dental office, research and development facilities No special-purpose properties - gas stations, car dealers, hotels, restaurants, car washes, bowling alleys, etc. 10

11 LISC Small Business Fund Loan Terms Loan size: $2.5 million maximum 1st mortgage $4.5 million total financing including 2nd mortgage $250,000 minimum 1st mortgage 60% maximum loan to value (1 st mortgage) Rate: Currently 4.35% fixed for seven years (as of 10/15/13) 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 No prepayment allowed for 7 years 11

12 Costs that can be financed Land & building, construction and land improvements Take out financing only (all construction funded by an interim/bridge lender) Professional fees appraisal, environmental, title, escrow, closing costs, bridge loan fees and interim interest reserve Contingency 12 not to exceed 10% of construction costs

13 LISC Small Business Loan Fund Underwriting Underwriting consistent with CDC global cash flow Cash flow DSCR of 1.0:1 No personal bankruptcies or foreclosures Minimum FICO score of at least 680 Written explanation for any derogs and any non - recurring expenses 13 Bank partner or LISC to provide interim/bridge loan Must have job creation/community impact story

14 Advantages of SBA 504 vs Conventional lenders Lower down payment Business owner pays only 10% down, borrowing up to 90% of the total financing needs, thus preserving cash for the business 14 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

15 Dental Associates Example Loan (Milwaukee) Large dental practice in a LISC sustainable communities neighborhood in Milwaukee $1.98 Million project to purchase and rehab the space that it currently leases Approximately $160,000 in cash flow savings over seven years 10 new jobs created and 70 jobs retained Primarily serves low-income and Medicaid patients 15 1 st mortgage 50% 2 nd mortgage 40% Sponsor Contribution 10% $990,000 MS lender of record LISC Small business fund purchases the loan and holds for seven years $792,000 Bridge loan from local bank Take out from SBA debenture $198,000 borrower contribution

16 Specialized Services (Phoenix) Example Loan Woman-owned, underground utility contractor with over 40 years experience $850,000 to refinance two properties in order to create $100,000 in annual cash flow savings 5-8 new jobs created 16 1 st mortgage 50% $453,000 MS lender of record LISC Small business fund purchases the loan and holds for seven years 2 nd mortgage 40% $382,289 Bridge loan from local bank Take out from SBA debenture Sponsor Contribution $198,000 borrower contribution 10%

17 Inpac Container (Los Angeles) Example Loan Corrugated box manufacturer purchased warehouse space in lowincome community for $1.35 million, which is closer to its customers. Grow from its current 18,000 square foot leased building to 35,000 square foot warehouse. Allows the company to fix its occupancy costs. 17 Will create three new jobs and retain five current jobs. Referred by LA LISC partner, PACE, a nonprofit focused on job training and employment. 1 st mortgage 50% $717,000 MS lender of record LISC Small business fund purchases the loan and holds for seven years 2 nd mortgage 40% $573,600 Bridge loan from LISC Take out from SBA debenture Sponsor Contribution 10% $143,400 borrower contribution

18 Foundry Building Example Loan (Indianapolis) 18 Before - Foundry Building After Nottingham Realty Office After- Foundry Provisions New space for a family-owned real estate broker and start-up coffee shop. $455,000 total project costs to purchase and rehab building in a neighborhood with a commercial corridor in the process of revitalization. Indianapolis LISC initially helped neighborhood purchase building and cleanup Brownfield many years ago. The two businesses will create at least 6 new jobs. 1 st mortgage 50% 2 nd mortgage 35% Sponsor Contribution 15% $227,500 MS lender of record LISC Small business fund purchases the loan and holds for seven years $159,250 Bridge loan from construction lender Take out from SBA debenture $68,250 borrower contribution

19 Advantages to Loan Originators 19 Local LISC programs and 504 CDCs can work through local banks for project sourcing and underwriting facilitation: Referral fee: Banks will receive a referral fee of 3% of the 1 st mortgage amount for these services $30,000 fee for a $1 Million 1 st mortgage loan Provide favorable financing terms to bank customers: Low rates, interest-only for 3 years, low origination costs to borrowers. Enhance bank liquidity: Program is designed for table funding of loans at time of origination. Loan originations do not require bank capital. Interim lending opportunity: Short-term bridge loans for the SBA-guaranteed 2 nd mortgage

20 Process Overview Send following information to to determine program eligibility: Business Name, Address, Loan Amount Once NMTC eligibility is determined, an intake form will need to be filled out to determine fit with community impact goals Next, a full loan application package needs to be completed; determine cash flow debt service coverage Local 504 CDC performs underwriting review; submits application to SBA for approval SBA Authorization and Debenture Guaranty issued After receipt of Certificate of Occupancy, Morgan Stanley closes permanent 1st mortgage and originating lender closes interim 2nd lien After 3 to 6 months, the net debenture proceeds (504 loan) wired to originating bank to payoff interim loan Local 504 CDC services the 504 loan. CDC Small Business services the 1 st mortgage 20

21 What to look for Opportunity to provide long-term financing to businesses in your neighborhoods for: Businesses currently leasing space and looking to purchase space Businesses expanding their space or looking to buy a larger property to enable expansion Businesses that currently own their facility and want to remodel, renovate and/or expand Creates incremental cash flow to the business owner in order to hire additional employees or otherwise invest in the growth of their business The business must be located in a NMTC eligible census tract Must have solid community impact or job creation story 21

22 Community Advantage Loans

23 Community Advantage Program Overview 23 Pilot program launched by the SBA on February 15, 2011, currently extended through March 15, Enables community-based, mission-focused lenders to make SBA 7(a) loans of up to $250,000 with the regular 7(a) government guarantee. Eligible lenders include Community Development Financial Institutions, SBA s Certified Development Companies and SBA micro lenders. Leverages the experience these institutions already have in lending in economically-challenged markets, along with their management and technical assistance expertise to help make their borrowers successful. Lenders must maintain at least 60% of their SBA loan portfolio in underserved markets, start-ups (firms in business less than 2 years); and veteran-owned businesses.

24 Community Advantage Lenders Currently 60+ approved lenders CDC Small Business Finance, Empire State CDC, and ACCION Texas are the largest lenders Most lenders have local, state, or regional licenses Only three existing national licensees Coastal Enterprises (ME), Dorchester Bay Economic Development Corporation (MA), Neighborhood Development Center (MN), and Kentucky Highlands (KY) are examples of LISC partners with CA licenses 24

25 Community Advantage Lender Terms 85% SBA guarantee for loans under $150,000 75% SBA guarantee for loans from $150,000 to $250,000 Guarantee covers 75% to 85% of all loan losses (not a lender first loss) 60% of lender portfolio must be in underserved markets SBA approves loans in 5-10 days Active secondary market for guaranteed portion of loans with 10% to 15% premiums upon sale 25

26 Community Advantage Borrower Loan Terms Borrowers must be for-profit companies with net income under $5 million and net worth under $15 million Loans can be used for working capital, inventory, business acquisitions, tenant improvements, and real estate purchases Maximum loan size $250,000 Interest rate limited to Prime plus 6.00% (currently 9.25%) SBA Guarantee Fee: 2-3% of guarantee portion Terms: 7-10 years; 25 years for real estate 26

27 Areas of Evaluation Credit of all principal business owners (20% or more owner) Capacity to repay loan 27 Evaluate all borrower income and expenses Collateral Must pledge what is available Capital 30% injection required by borrower (for start-ups) Economic and Industry Conditions Experience in the Industry >2 years Possible co-signer can mitigate other weaknesses Business Plan Projections and assumptions upon which the projections are based

28 Types of Loans Viable businesses with some strengths, but not strong enough for bank financing Some reasons banks won t fund these businesses: Limited industry experience Weak collateral Tight cash flow Leveraged Credit issues Small dollar amount of loan 28

29 Sample Loan Business Expansion Borrowers started their software development company in 2009 for the mobile technology industry. They provide mobile processes to small and medium business that collect and use data remotely. Borrowers were seeking financing to grow the business via additional staffing, marketing, and new software products. Project: $100,000; loan $100,000; equity injection $0 Strengths 29 Cash flow in the last two years, above 2.0 DSC. Strong experience in the industry. One borrower has strong credit of 721. Outside income of $50K annually to help meet personal living expenses. Weaknesses No collateral. Limited personal ($8,000) and business ($16,000) liquidity. Foreclosure on rental property in Credit score 669. Bank would not fund due to lack of collateral, no capital injection, and a foreclosure in 2011.

30 Contact Information KEVIN BOES President & CEO, New Markets Support Company KELSEY HAMORY Associate Underwriter, New Markets Support Company