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The “504” Loan Program

The “504” Loan Program. “504” Loan Program Purpose. Stimulate private sector investment by: Creating (or retaining) job opportunities. One Job / $50,000 & $100,00 for mfg. Increasing productivity Increasing the local tax base. “504” Program Objectives. Job creation or retention

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The “504” Loan Program

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  1. The “504” Loan Program

  2. “504” Loan Program Purpose • Stimulate private sector investment by: • Creating (or retaining) job opportunities. One Job / $50,000 & $100,00 for mfg. • Increasing productivity • Increasing the local tax base

  3. “504” Program Objectives • Job creation or retention • Portfolio versus Project OR • Achievement of: • community development goals or • SBA’s public policy goals

  4. “504” Lending Limits • UP TO 40% of eligible “504” project costs: • $50,000 minimum • $1,500,000 maximum • $2,000,000 maximum for projects satisfying a public policy goal* • $4,000,000 maximum for mfg. with $100,000 minimum job requirement

  5. “504” Loan Terms: Maturity • Maturity is EITHER 10 OR 20 years. • The “504” loan term is based on the economic useful life of the assets financed. • For equipment financing, the term is 10 years(requiring a minimum 7-year term from the senior lender). • For commercial real estate financing, the term may be 10 years OR 20 years (requiring a minimum 10-year term from the senior lender).

  6. Common 504 Loans • 51% Owner Occupied Commercial/industrial buildings • Hotels/motels • Assisted living, personal care and nursing home facilities • Day care and child care facilities • Automobile and motorcycle dealerships • Gas Stations/convenience stores • Fitness centers • Restaurants • Agricultural Expansions

  7. A Typical 504 Project Financing Structure • 50/40/10 = 90% Financing: • 50% Private sector loan • 40% 504 loan • 10% Equity or subordinated debt* • Seller Financing – 20yrs • Economic Development Financing – 15 yrs

  8. Loan Structure for Start-up or Single Purpose Project • 50/35/15 = 85% Financing: • 50% Private sector loan • 35% 504 loan • 15% Equity or subordinated debt

  9. Combination “504” Loan Structure • Combined Start-up AND Single Purpose project financing requires financing levels of 50/30/20 = 80% Financing: • 50% Private sector loan • 30% 504 loan • 20% Equity or subordinated debt

  10. 504 Benefits • Borrower Benefits • 90% + Financing • Bank Loan/Direct Loan from SBA (2 loans) • Below Market Fixed Rates (SBA portion) • Working Capital Preservation • Lender Benefits • Blended Interest Rate offered Borrower • 50% Loan to Value • CRA Credits

  11. Economic Advantage • Bank Loan fixed for 5 years – 50% • SBA Loan fixed for 20 years – 40% • 50-100 basis points less than 5 –year rate • Blended Rate = More Competitive Proposal from 1 of 42 Banks

  12. “504” Loan Terms: Rate of Interest “504” loan rates are fixed for the life of the loan and are determined one week prior to the date of debenture funding Note: “Funding” occurs approximately 60 days after completion of a “504 project.”

  13. “504” Loan Terms: Rate of Interest

  14. “Blended” Rate of Interest

  15. Credit Considerations • 50% Loan to Value • No SBA Portfolio Reporting Requirements • No SBA Documentation • Third Party Lender Agreement • Minimum 7 or 10 year term commitment

  16. Land and building acquisitions New construction Building renovations/ leasehold improvements Major machinery and equipment with a minimum 10 year economic life Related costs * Related costs include: Acquisition-related legal expenses Bridge loan points and interest Construction contingency up to 10% Professional fees Eligible soft costs Eligible “504” Project Costs Typically incurred within 9 months of application submission.

  17. Eligible Project Costs

  18. “504” Debenture Fees • 2.50% up front “administrative costs” consisting of: • 0.50% “User Fee” (guaranty fee paid to SBA) • 1.50% “CDC Processing Fee” (application fee paid to CDC) • 0.25%* “Funding Fee” (paid to Colson Services) • 0.25%* “Underwriters’ Fee” for 20-year debentures (0.375%for 10-year debentures) • Plus up to 2,500 to cover CDC legal fees

  19. 504 Fee Summary • 2.5% Capitalized Costs • Monthly Servicing Fees (included in the “All-in-Rate” • Third Party Lender Fee • 0.05% of 1st Mortgage (included in the bridge loan financing)

  20. Out of Pocket Expenses • $1,500 Application Deposit • Refunded • Legal Costs Related to Closing • Simultaneous Closing • Life Insurance Costs (underwriting decision) • Title Insurance • One policy versus two

  21. The “504” Loan Process

  22. “504” Loan Process • Call CDC/Seedco prior to Lender Underwriting • Determine Eligibility • Identify “Eligible Project Costs” • Joint Calls to Borrower • Preliminary Stage

  23. “504” Loan Process • Submit Bank Underwriting Documents to Seed Co • Background on Borrower/Operating Company • Historical Financial Information • Project Details • Projections (if applicable) • Parallel Underwriting • Identify Closing Counsel and Title Insurance

  24. “504” Loan Process • Bank Approval/SBA Approval • Bank Closing/Simultaneous CDC Loan Closing (no construction) • Construction Complete/ Certificate of Occupancy Received/CDC Closing • Debentures Sold and Bank Repaid • Bank Loan Servicing by Bank • SBA Loan Servicing by CDC

  25. Considerations • Turnaround time by the CDC is typically 30 days from the date of receipt of a complete 504 loan application • 20-year debentures are pooled and sold monthly; 10-year debentures are pooled and sold every other month • 504 funding may NOT be subordinated to tax-exempt revenue bonds or mortgages

  26. 504 Guaranty Requirements • For EPC projects, small business must guaranty loan conceived • As a rule, any officer, owner, or director who controls 20% or more of the stock of the company will be required to guarantee the loan • SBA may require limited guaranty for anyone owning 5 % - 19% of the business

  27. 504 Loan Program Issues -Borrower • Interest rate riskbetween approval and funding • Prepayment premium • Jobs requirement Mitigating factors: (1) interest rates and “504” administrative loan fees have been steadily decreasing since May 2000; (2) prepayment premium is due only during the 1st ½ of the 504 loan term and steadily decreases to 0%; (3) job creation or retention requirement is only 1 job/$50,000 of “504” loan and is waived for public policy projects. No penalty for job creation shortfalls on an individual loan basis for established CDCs with a qualifying portfolio average.

  28. Summary • 90%+ Financing • 50% Loan to Value for Lender • 40% plus costs to SBA • Blended Below Marketing Interest Rates • 70-100 Basis Points Below Conventional Financing • 30 Day Turnaround for Approval

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