504 Your Small Business 1
Is the 504 loan program appropriate for your business? 2
Duke s Clothing in Wahiawa Gail Nakasone 3
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Uptown Chevron In Wailuku, Maui Alvin Makimoto 5
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Miyake Concrete Accessories, Inc. David Miyake 7
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Hawaiian Carpet One Myles and Joyce Kawakami 9
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Menehune Water Company Inc. Kenneth Simon 11
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Ace Auto Glass Inc., Oahu, Hilo and Maui Calvin Tamaye and Stephen Tamaye 13
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504 Loan Program 15
SBA 504 Loan Program This long-term, fixed-rate loan program was designed to boost economic development by supporting small business expansion and creating jobs. Advantages are: Lower down payment Fixed rate Rate is usually below market rate All project costs can be financed. 16
SBA 504 Features Two loans totaling up to 90% of project costs 50% Lender 40% CDC Long-term, below-market fixed interest rate on CDC loan 10 or 20 year maturities on CDC loan Each project promotes job creation, community development or public policy goals 17
MINIMUM PROJECT SIZE $125,000 (debenture cannot be less than $50.0M) There is no maximum limits to project size. AMOUNT OF LOAN 504 loan is a maximum 40% of project costs, up to $5,000,000. (Within SBA public policy goals it may go to $5,000,000 and for small manufacturers $5,500,000.) effective 10/25/10 18
Use of Funds The 504 program provides loans to business ventures for fixed-asset acquisition or expansion including the following: Purchase land and construct new buildings. Purchase an existing building and make necessary renovations. (This could be the building in which the small business currently operates.) Acquire and install machinery and equipment with a minimum 10-year economic life. Construct or remodel buildings on leased land (where the lease is longer than the term of the 504 loan). Soft costs associated with such projects. 19
Typical Funding for an Established Business Bank 50% SBA 504 40% Equity 10% 20
Typical Funding for a Special Purpose Building or Start-up Business Bank 50% SBA 504 35% Equity 15% 21
Limited or Special Purpose Property-15% Cold Storage Facilities where more than 50% of total square footage is equipped for refrigeration Gas stations Service Centers (e.g., oil and lube, brake or transmission centers) with pits and in ground lifts; Car wash properties Hospitals, surgery centers, urgent care centers and other health or medical facilities Nursing homes and assisted living facilities Farms, including dairy facilities Tennis clubs Golf Courses Swimming pools Amusement parks Sport areans Bowling Alleys Dormitories Hotels and motels Theaters Funeral homes with crematoriums Quarries, including gravel pits 22
Typical Funding for a Start-Up and Special Purpose Bank 50% SBA 504 30% Equity 20% 23
Equity Business Cash and Personal Cash Land and Building Equity at purchase price if acquired less than 2 years ago at appraised value if acquired 2+ years ago Sale or Loan Against Personal Assets 2nd DEED of Trust Seller Carryback Note (must be 24 subordinate)
Cost Comparison : Conventional vs. 504 - Interest Savings Assumptions: $1,000,000 Total Project Costs $100,000 Owner Contribution 10.00% $900,000 Total Financing Required 90.00% 9.5% Interest Rate on Conventional Financing 20 Amortization on SBA portion 25 Amortization on conventional/bank portion 7.90% Rate of Interest on SBA Loan 25
Cost Comparison : Conventional vs. 504 - Interest Savings Conventional Financing Scenario -- If you can find a lender who will finance 90% of the project costs Loan Amount Rate Amortization Interest Paid $900,000 9.50% 25 year $1,458,981 SBA 504 Financing Scenario Loan Amount Rate Amortization Interest Paid Bank $500,000 9.50% 25 year $810,545 SBA/CDC $413,000 7.90% 20 year $409,921 26
Cost Comparison : Conventional vs. 504 - Interest Savings Total Conventional Scenario Interest $1,458,981 Total SBA 504 Scenario Interest $1,220,466 INTEREST SAVINGS TO THE BUSINESS BY USING SBA 504 $238,515 Monthly payment utilizing conventional financing $7,863 Combined monthly payment under SBA 504 $7,797 These rates are only estimates. The actual rates and savings may vary at time of closing. 27
Updated Comparision Conventional Loan Amount Rate Amortization Interest Paid Bank $900,000 6.1% 25yrs $856,156 504 Loan Amount Rate Amortization Interest Paid Bank $500,000 6.1% 25 yrs $475,642 SBA/CDC $400,000 6.0% 20 yrs $287,774 $763,416 Savings $92,740 28
Cost Comparison : Conventional, SBA 7(a) and 504 - Basic Upfront Costs Assumptions: $1,000,000 total project costs Cash required for the equity contribution of 20% on a conventional and SBA 7(a) loan $200,000 Loan Fees of: 2% on conventional and per current SBA policy on the SBA 7(a) loan guaranty 3.50% and 2.75% on 504 portion of debt 29
Cost Comparison : Conventional, SBA 7(a) and SBA 504 - Basic Upfront Costs COMPARISONS: Conventional SBA 7(a) SBA 504 Total Financed $800,000 $800,000 (75% Guaranty) $900,000 Equity Contribution $200,000 $200,000 $100,000 Loan Fee $16,000 (2.0%) $21,000 * SBA Guaranty Fee 0 $21,000 (3.5%) 0 Legal Estimate $2,500 $2,500 *$2000 (financed into loan amount) 30 Total Cash Need $218,500 $223,500 $110,000
** Bank 2.00% on $500,000 = $10,000 Est CDC Fee 2.75%-3.0% on $400,000 = $11,000 (financed into loan amount) Total $21,000 31
Example: caption from the Authorization 1. Debenture Proceeds: Debenture Proceeds will be used to pay Administrative Costs and the final 40.00% of the total Project Cost. Prior to the Debenture sale, the CDC conducts a 504 Loan Closing ("504 Loan Closing"), and forwards the closing documents to SBA. After review and approval, SBA forwards the closing documents for Debenture Sale. At or prior to the 504 Loan Closing, Borrower and CDC must sign a Servicing Agent Agreement certifying as to the actual use of the Debenture Proceeds and authorizing a Central Servicing Agent ( CSA ) to handle all disbursements and payments under the Debenture. a. SBA/CDC Share: 40.00% of total Project Cost ( Net Debenture Proceeds ) b. Administrative Costs ( Administrative Costs") $400,000.00 (1) SBA Guarantee Fee (a. x 0.000) $ 0.00 (2) Funding Fee (a. x 0.0025) $1,000.00 (3) CDC Processing Fee (a. x 0.015) $6,000.00 (4) Closing Costs (i) CDC Closing Fee (not to exceed $2,500) $2,500.00 (ii) Other Out of Pocket Closing Costs (excluding legal fees) $0.00 $2,500.00 (5) Subtotal (b.1 through b.4) $9,500.00 (6) Underwriters Fee* $1,648.00 (7) Total (b.5 plus b.6) $11,148.00 c. Total Debenture Amount ( Gross Debenture Proceeds ) (a. Plus b.7, rounded up to next thousand) $412,000.00 d. Balance to Borrower (c. minus (a. plus b.7)) $ 852.00 * Underwriters fee calculated as follows: For 20 year Debentures, the sum of a. and b.5 divided by 0.99600; round this number up to the next highest thousand; multiply this number by 0.00400. For 10 year Debentures, the sum of a. and b.5 divided by 0.99625; round this number up to the next highest thousand; multiply this number 32by 0.00375.
1) Third-Party Participation Fees and 2) CDC Processing Fees February 17, 2009, amends the minimum number of jobs that are required to be created or retained per dollar amount guaranteed by SBA by increasing such dollar amount from $50,000 to $65,000 as follows: (1) A Project must create or retain one Job Opportunity per $65,000 of 504 loan funding, or (2) For Projects that are eligible under the 504 Program under 13 CFR 120.862, a CDC s portfolio must reflect an average of one Job Opportunity for every $65,000 guaranteed by SBA. The above changes apply to new loan applications received on or after February 17, 2009. 33
504 Benefits to the Bank First lien position with low loan-to-value reduces your collateral risk. You build a stronger banking relationship by providing your customer the benefits of a 504 loan, while maintaining your relationship. The Bank s loan at 50% of project costs allows those with inhouse lending limits to preserve available funds for the firm s future working capital/growth needs. 34
Third Party Lender Pays a Fee a.third Party Lender Fee. SBA must collect a one-time Third Party Lender Participation fee equal to 50 basis points on the Third Party Lender s participation in a project when the Third Party Lender is in a senior credit position to SBA on the project. SBA may accept payment of this fee from the Third Party Lender, the 504 borrower, or the CDC. This payment may be made to SBA by (1) the Third Party Lender sending to the CDC a certified check or guaranteed funds check made payable to the CSA, and CDC forwarding it to the CSA with the 504 Loan Closing documentation, or (2) the CDC may collect the fee and the CSA will deduct the amount of the fee from the amount sent to the CDC after Debenture sale. 35
504 Benefits to the Borrower A 504 loan can provide your borrower up to 90% financing for fixed-assets construction and acquisition at below market rates. Your borrower can access below-market, long-term, fixedrate funds which enhances cash flow of the firm. Twenty-year term avoids balloon payments, renegotiation of the loan, and possibly higher payments. The lower down payment conserves valuable working capital of the small business for future growth. 36
Borrower Pays On Going Fees 1. Borrower s Fees ( Borrower s Fees ) Borrower must pay: a. An ongoing guarantee fee equal to 0.00 of one percent per annum of the principal balance of the Note calculated at five-year intervals beginning with the first payment. This guarantee fee will be made until the loan is terminated. It will be included with the payment on the Note made each month to the CSA. The CDC servicing fee, at the minimum, will be 0.625% 37
Financing on a Typical $1,000,000 Project ENTITY LOAN AMOUNT % OF PROJECT SECURITY Lender $500,000 50% 1 st Mortgage CDC/SBA $400,000 + fees Business $100,000 10% 40% 2 nd Mortgage Total $1,000,000 38
Land $125,000 Construction $425,000 Contingency $25,000 Permits $2,500 Site Preparation $5,000 Architect/Engineering$25,000 Machinery/Equipment$54,000 Eligible Project Costs Sales Tax $39,278 Title Insurance $2,500 (if title transfers) Escrow $750 Appraisal $4,000 Environmental Report $2,500 Interim Loan Fee $9,600 Interim Interest $30,000 (Constr. period plus 3 months) TOTAL $750,128 INELIGIBLE COSTS: 50% Bank $375,064 40% CDC $300,051 10% Borrower $75,013 *Any costs incurred within 9 months prior to submission to SBA are eligible toward the total project costs. Working Capital Inventory 39
Expenditures within 9 months Expenditures within 9 months of the date of the application, including land, building and/or equipment, can be included in the project cost and be reimbursed by the interim lender net of the equity requirement. Costs incurred prior to that date may be included solely at the SBA field office s discretion. This rule allows for refinancing where otherwise it would not be considered eligible project cost. 40
504 Job Requirements and Exceptions One job for every $65,000 except for: manufacturers (SIC codes 20-49); exporters (10% or more of sales); minority owned businesses (by U.S. citizens of a designated minority group); women owned business veteran owned businesses projects in areas with written redevelopment plans; projects in Labor Surplus Areas; projects which will provide significant community benefit projects in rural areas; projects in areas affected by federal budget cutbacks; modernization and upgrading improving environment or safety and health of employees; and projects that increase productivity and competitiveness (robotics, retooling, modernization competition with imports. 41
Exceptions Going Green (a) Reduction of existing energy consumption by at least 10% (this cannot apply to a startup business, however, an existing business buying a building may be eligible if the new location uses at least 10% less energy than the prior location); (b) Increased use of sustainable designs, including designs that reduce the use of greenhouse gas emitting fossil fuels or low-impact design to produce buildings that reduce the use of non-renewable resources and minimize environmental impact; or (c) Plant, equipment and process upgrades of renewable energy sources such as the small-scale production of energy for individual buildings or communities consumption, commonly known as micropower, or renewable fuel producers including biodiesel and ethanol producers. Note: the terms in subparagraphs (b) and (c) have the meanings given those terms under the Leadership in Energy and Environmental Design (LEED) standards for green building certifications. 42
Size Standard Businesses, when combined with affiliates, must: have less than a $15,000,000 tangible net worth have less than $5,000,000 in net income (average for last 2 years) There is no limitation on annual sales volume. 43
Availability of Personal Resources Any business owner of 20% or more can retain personal liquid (cash or securities) assets according to a tiered schedule. Requirements are the same as in the 7(a) Loan Program. Total financing of $250,000 or less allows retaining personal liquid assets up to the greater of two (2) times the total project financing or $100,000. Total financing between $250,001 and $500,000 allows individual owners to retain one and one-half (1-1/2) times the total project financing or $500,000, whichever is greater. Total financing in excess of $500,000 can retain liquid assets equal to the amount of the total project financing or $750,000, whichever is greater. 44
Occupancy Requirements The business may lease out a portion of the building it intends to occupy in future years. However, the business must be able to support the entire new debt service requirement without relying on rental income. The following occupancy requirements must be met: The business must occupy at least 51% of an existing building. It may lease out the other 49% of the building. The business must occupy at least 60% of a newly constructed building. It may temporarily lease out 20% of the space, but must occupy some of this space within 3 years and all of it within 10 years. It may permanently sublease 20% of the newly constructed facility. 45
Occupancy Requirements 7(a) and 504 Loans--rental income: A separate analysis of both the operational income and rental payments must now be provided when an applicant business has to rely on rental income to demonstrate overall repayment In addition, when rental income is relied upon to make the case of repayment ability, the validity of projected rental income must be independently substantiated Evidence can include but is not limited to the evidence of existing rental agreements that will transfer with the purchase; or an appropriate Real Estate Association Report on the need and desirability for that type of space 46
Occupancy Requirements If the nature of the business requires a resident owner or manager, loan proceeds may be used for the purchase of an existing building(s) or construction of a new building(s) that includes residential space however such residential space may not exceed 49% of the total property. If the projected rental income is included in the repayment analysis, it must be independently substantiated. 47
Ownership of Building By the Operating Company (OC) By an Eligible Passive Company (EPC) Individuals New corporation Partnership Limited liability corporation Trust Ownership need not be identical. 48
Similar to bank s requirements Environmental Review Questionnaire Transactional Screening Analysis (TSA) Phase I Appraisal Requirements 49
Getting Started-continued -Valid identification -Organization documents (Articles, By-Laws, Operating Agreement, etc) -ID numbers (Federal and State) -Must be in good standing with DCCA 50
Loan Package Credit Application Business Plan (History, Resumes, etc) Federal Tax Returns (3 years) Interim Financial Statements (within 90 days) Projections Agings of Accounts Receivables and Payables Jobs-in-Progress Personal Financial Statements and Tax Returns of any owner of 20% or more. 51
Other Information DROA Lease Agreements Trust Documents Franchise Agreements Environmental Questionnaire 52
Credit Decision - 5 C s Character (Trust, Credit Score) Capacity (Cash Flow, Repay the Loan) Capital (Owner s investment in company) Collateral (Assets supporting the Loan) Conditions (External factors - economy, competition, product life) 53
Questions to Answer Credit History Industry, Economic conditions Customers, Competition, Financial evaluation (revenue trends, margins, liquidity) Asset quality (receivables, inventory, etc) Cash flow Secondary sources of repayment Comply with SBA guidelines 54
Conditional Approval - Now What? CDC and SBA approvals Appraisal Environmental Assessment (Phase I, Phase II) Plans and Specs (certified by architect & City Building Dept) Project Budget, Contracts, Permits Bonding Insurance (Hazard, flood, Preliminary Title Report Tax Clearance 55
Patience Appraisals - 6-8 weeks Environmental Analysis CDC approval City Permits Encroachment issues 56
Fees and Deposits Est CDC Fees 2.75% of CDC Net Loan Amount Financed in addition to loan proceeds $2,000 legal fees + closing costs CDC collects a deposit equal to the lesser of $2,500 or 1% of its loan amount Collects balance of 1% (if any) after SBA approval Refunded after closing Bank Fees Negotiated between Bank and Borrower Not regulated by SBA 0.5% charge to Bank by SBA on the bank s permanent loan amount 57
Prepayment During the first half of the loan term No partial prepayment can be made Calculated as a declining percentage Can be assumed for a 1% fee * Example: Year 1 Debenture - $300,000 Year 2 Debenture Year 3 Rate = 8.50%, Year for a 420-year debenture: Year 5 100% of deb. Rate 8.50% of $294,000 90% of deb. Rate 80% of deb. Rate 70% of deb. Rate 60% of deb. Rate 7.65% of $287,500 6.80% of $280,500 5.95% of $272,800 5.50% of $264,400 = $24,990 = $21,994 = $19,074 = $16,232 = $13,484 Year 6 Year 7 Year 8 Year 9 Year 10 50% of deb. Rate 4.25% of $255,300 40% of deb. Rate 30% of deb. Rate 20% of deb. Rate 10% of deb. Rate 3.40% of $245,300 2.55% of $234,500 1.70% of $222,800.85% of $210,000 = $10,850 = $8,340 = $5,980 = $3,788 = $1,785 Note: Prepayment to occur at the end of the year. There is no penalty from years 11 through 20. 58
APPENDIX 59
What is Needed for an Application After CDC makes its preliminary determination of eligibility, it needs the following information to prepare a 504 application: CDC Loan Information Summary; Tax returns and financial statements for past three fiscal years on the business; Tax returns (2 years) and current financial statements of other businesses owned or controlled by the small business owners; Current financial statement on the business, dated within 60 days of the application; including notes to the financials detailing terms of any existing longterm debt; Projected profit & loss statement (2 years) and proforma balance sheet; (required for start-ups or if ability to service proposed debt isn t demonstrated by historical earnings) 60
What is Needed for an Application Cash flow projection for the first 12 months (on a start-up business); Current personal financial statements and tax returns (3 years), with related schedules, on owners of 20% or more of the business; Appraisal of the completed project; Environmental search or assessment; Lender s commitment letter; Letter from the lender regarding the lack of availability in the private sector of financing under the terms and conditions provided by a 504 loan (CDC will provide a suggested form letter); Purchase and Sale Agreement for land or building acquisition or escrow settlement statement on land purchase; 61
What is Needed for an Application Cost estimates or bids from contractors and suppliers of equipment, fixtures, etc.; Itemization of all known and anticipated project costs; Overview of the business, its operations, and management; Details of any current SBA loans with outstanding balances; The business concern must also sign some SBA forms that CDC will prepare for all owners to sign as part of the application. 62
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