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SBA 504 Program SBA 504 Program Overview Overview
Georgia Small Business Capital
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– 504 Program Features & Benefits to Banks– Loan Processing, Closing & Servicing
General understanding of the SBA504 loan program from origination to servicing.
Goal
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Benefits to Banks
1st lien position with low loan-to-value –- reduces collateral risk
CDC staff manages all SBA forms, packages, closes & services the SBA loan
Provide customers opportunity to obtain 504 loan building stronger banking relationships
50% funding allows banks with in-house lending limits to preserve available funds for borrower’s working capital/growth
Helps with CRA credit requirements
You set your own rate and fees
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Benefits to Borrower
Up to 90% financing for project
Long-term, fixed rate funds … enhancing cash flow for business
10 or 20 year term … avoids balloon payments or loan extension
Lower down payment conserves working capital
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How 504 Works for You -
Mitigation of credit risk
Liquidity management
Managing overall lending limits
Strengthening core earnings through a highly marketable commercial lending product
Serving your customer’s needs in the community
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Use of Funds
Fixed-Asset Acquisition or Expansion Including:
Purchase land & construction of new buildings Purchase and/or renovate existing buildings Acquire/Install machinery Construct or remodel buildings on leased land Soft costs involved in above projects
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Maximum Amount of Loan
Up to $4,000,0000Maximum 40% of project costs ($2,000,000 if within
SBA Public Policy Goals)
Minimum Amount of Loan
$50,000There is no maximum limit to project size.
Project Size Requirements
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Job Requirements
Provide one job for every $65,000 funded
Exception:
Projects that meet SBA Public Policy Goals
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Public Policy Goals
Rural Development
Expansion of Minority, Women or Veteran-Owned Business Development
Expansion of Exports
Business District Revitalization
Enhanced Economic Competition
Restructuring Due to Federally Mandated Standards and/or Policies
Changes Necessitated by Federal Budget Cutbacks
Opportunity to fund up to $4 Million and Not Required to Create one job for each $65,000
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Not Eligible for 504 Funding Non Profits
Lending institutions
Life Insurance companies
Private clubs
Speculative investment
Non-owner occupied building
Gambling concerns
Businesses engaged in promoting religion
Cooperatives
Political or lobbying services
Businesses located in foreign country or owned by an alien
Businesses selling through pyramid plans
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Typical Structure for Established Business Loan
Bank -50%
SBA 504 Loan -40%
Owner’s Equity –10%
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Typical Structure for a Special Purpose Building OR Start-up
Bank50%
SBA 504 Loan 35%
Owner’s Equity15%
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Typical Structure for Start-Up Business
AND Special Purpose Building
Bank 50%
SBA 504 30%
Owner’s Equity 20%
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Financing on Typical $1 Million Project
Loan % ofEntity Amount Project Security
Lender $500,000 50% 1st Mortgage
CDC/SBA $400,000 + 40% 2nd Mortgage fees
Borrower $100,000 10%
TOTAL: $1,000,000 100%
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Eligible Project Costs:
Land $ 125,000Construction 625,000Contingency 29,000Permits 2,000Site Preparation 5,000Architect/Engineering 25,000Machinery/Equipment 144,000Appraisal 4,000Environmental Report 2,000Interim Loan Fee 9,000Interim Interest 30,000 (Construction period + 3 months)
TOTAL $1,000,000
50% Bank $500,00040% CDC $400,00010% Owner $100,000
100% $1,000,000
Any costs incurred within 9 months prior to submission to SBA
are eligible toward total project costs
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Ineligible Costs: Debt Refinancing
Third Party Loan Fees
Ancillary Business Expenses-
Working capital
Counseling or management services fees
Incorporation/organization costs
Franchise fees or Advertising
Fixed Asset Project Components -
Short term equipment
Auto/trucks
Construction equipment
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Occupancy Requirements
Existing Building: Business must occupy at
least 51% - may lease out the other 49%
Newly Constructed Building: Business must occupy at least 60% - must occupy up to 80% within 10 years
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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
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Size Standards
Business – when combined with affiliates must:
Have less than $7,500,000 tangible net worth
Have less than $2,500,000 in net income (average for last 2 years)
There is no limitation on annual sales volume
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Availability of Personal Resources
Any business owner of 20% or more can retain personal liquid assets (cash or securities) according to a tiered schedule.
Requirements are the same as in the 7(a) program.
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Appraisal Requirements
When more than $250,000 of loan proceeds are used for real estate transactions
For loans over $1,000,000 New construction
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Environmental Requirements
Questionnaire Only –
Bare land no history of agricultural use When Phase I completed within 1 year Project involves multi-unit condominiumTSA or Phase I required-
When questionnaire indicates risk of environmental contamination
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Comparison Conventional vs 504 Loan
Assumptions: Total project costs = $1,000,000
$ 100,000 Owner contribution (10%) $ 900,000 Total financing required (90%)
7.00% Interest Rate on Conventional Loan 25 Amortization on conventional/bank portion
5.50% Rate of interest on SBA loan 20 Amortization on SBA portion
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Comparison Conventional vs 504 Loan
Conventional Financing Scenario -
Loan Amount Rate Amortization Interest Paid $900,000 7.00% 25 year $2,390,000
SBA/CDC 504 Financing Scenario -
Loan Amount Rate Amortization Interest PaidBank $500,000 7.00% 25 year $1,328,000CDC $406,000 5.50% 20 year $ 269,000
$1,597,000
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Comparison Conventional vs 504 Loan
Conventional – Total Interest$2,390,000SBA 504 – Total Interest$1,597,000
Interest Savings to Business with 504 = $793,000
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Prepayment
Prepayment penalty applies
Depending on interest rate, it may be beneficial to prepay the bank loan first
Two prepayment windows are available to minimize interest expense
First Half of 20 year Debenture
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Fees Charged by CDCFinanced as part of 504 loan – 2.15% of net debenture
CDC Processing Fee:1.50%
Underwriting Fee: 0.40%Covers expense of pooling & underwriting 504 debenture –paid directly to Merrill Lynch
Funding Fee:0.25%Paid to Development Company Funding Corporation
Total: 2.15%
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Legal Fees
Closing costs can be financed into the gross debenture & paid to CDC’s closing attorney
Legal costs incurred that are not financed –
Title insurance Recording fees UCC searches
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Bank Fees
Bank Participation Fee – paid by GSBC
0.5% charge to Bank by SBA on the Bank’s permanent loan amount
Not included in SBA financing structure
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Debenture Rate
Based on current market conditions at the time the debenture is sold
Paid to bond investors on semi-annual basis
Negotiated by DCFC, Underwriters & U.S. Government
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Effective Rate
Rate the borrower actually pays
Note rate TBD% Annual Central Servicing Agent Fee 0.10%CDC Servicing Fee 0.625%Loan Loss Reserve Fee 0.021%
Effective Rate XX%
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Interim Loan
Used to facilitate change of ownership within timeframe specified in the contract
Used to finance construction and/or improvements to property – if applicable
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Bank’s Permanent Loan
Permanent financing must be for at least 10 years – (on a 20-year debenture) with no balloon payments during that time
Re-pricing is allowed – usually every 5 years
It’s possible to start amortizing the bank’s loan before the 504 loan is in place
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Funding the 504 Loan
When SBA Authorization is received –
CDC reviews for changes and/or errors
Copies sent to Borrower & Bank with instructions
Bank orders Appraisal & Environmental review (if not already completed)
CDC orders Preliminary Title & UCC searches (if needed)
Work begins on obtaining required documents – corporate resolutions, certificates of good standing, etc.)
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Funding Process
CDC schedules “Authorization Meeting” with Bank and Borrower to:
Review terms & conditions Set action steps & time line Review for errors Collect balance of borrower’s fee Sign authorization & collect any other documents
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Next Step in Funding Process
Before a debenture sale date is set:
Title must be taken by new owner
Interim loan must be fully disbursed
Construction or remodeling must be complete
Permanent Certificate of Occupancy or Certificate of Completion must be forwarded to CDC
Borrower’s financial statements must be current within approx. 120 days of targeted funding date
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Next Step in Funding Process
Once Debenture is Sold –
Funds are wired to Bank to pay down interim loan
Letter sent to Borrower stating effective loan rate, payment amount & due date of first payment
One week later, final closing letter sent to Borrower with Amortization Schedule & Debenture Note
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Important Notes:
It can take up to 3 months to fund the 504 Debenture once project completed
Any changes to the Authorization require SBA approval Borrower is prohibited from converting part of the interim loan to Bank’s term loan prior to funding the 504 loan
Bank should set the maturity date on interim loan to coincide with estimated 504 funding date not project completion date
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Events that can Delay Funding Process:
Changes in project costs
Lower than expected appraisals
Incomplete or negative environmental investigations
Changes in Borrower’s organizational structure
Adverse financial change in the operating company
Lawsuit, divorce or other legal issues
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Delay in receiving Subordination Agreements or UCC filings
Unexpected Deeds of Trust or Liens on collateral
Delays in obtaining a final title policy to property taken as collateral
Delays in completing documentation within time allotted
Property or owner insurance issues
Delays to Funding Cont:
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Example of Estimated Timeline
Day 1… Project is complete. Title is transferred toBorrower. All outstanding documents havebeen submitted to CDC.
Day 15… File sent to CDC’s legal department for creation of legal documentation.
UCC requests sent to Borrower for signatures(if applicable).
Legal documentation sent to Borrower &Banker for review & signatures. UCC filingsreturned by Borrower & sent into State forfiling.
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Day 60… Legal documentation returned & recorded.Final closing package forwarded to SBA forreview.
SBA Field office reviews package & forwards to the Central Servicing Agentfor next Debenture sale.
Day 90… Debenture sale. Interim loan paid down & closing letter sent to Borrower.
Day 135… Refund sent to Borrower & file forwardedto CDC servicing department.
Estimated Timeline Cont.
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Responsibilities of Borrower & Banker
Inform CDC Loan Officer of any changes
Inform CDC Loan Officer when project complete
Submit all requested documentation
Provide proof of equity contribution by Borrower
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Responsibilities of the Banker
Provide title insurance information to CDC Closing Department as soon as possible
Provide an appraisal to the CDC
Provide appropriate environmental investigation to the CDC
Provide letter stating interim loan is fully disbursed
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Responsibilities of CDC Loan Officer
Continuous contact to track project progress
Resolve project cost increases/decreases or other changes
Answer questions & provide information
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CDC Servicing Responsibilities
Loan servicing responsibilities include, but are notlimited to:
Monitor, track & review borrower’s financial statements, insurance coverage of collateral, physical condition of asset, payment of taxes & UCC continuations
Monitor loan repayment, collection & prepayment requests
Evaluate requests for change relative to original terms & conditions of the SBA 504 loan (i.e. collateral changes, ownership changes & assumptions)
Work-out situations, problem loans & liquidation
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Feasibility Assessment for 504
Purchase & sale agreement or terms of sale
Cost breakdown of project
2 years of company tax returns and/or financial statements
Detailed schedule of long-term debt
Eligibility
Personal financial statement & 1 year of personal tax returns
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504 Advantages to Pass on to your Clients
A low down payment to improve your client’s cash flow – They conserve valuable working capital and You have a stronger borrower
A fixed-rate 504 loan to minimize the risk of future rate uncertainty
A longer term to bring debt service in line with cash flow generated by a long-term asset
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For Your Next Small Business Borrower
Planning an Expansion . . .
Consider an SBA 504 Loan
Contact GSBC to Make it Happen!
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