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A Lender’s Guide to the SBA 504 Loan Program. QUALITY CIRCLE March 14, 2019. Presented By :. Rebecca MacBlane Executive Director Regional Development Funding Corporation. Today’s Presentation. SBA 504 Expansion Program Loan Structure Eligibility SBA 504 Refinance Program Loan Structure
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A Lender’s Guide to the SBA 504 Loan Program QUALITY CIRCLE March 14, 2019
Presented By: Rebecca MacBlane Executive Director Regional Development Funding Corporation
Today’s Presentation • SBA 504 Expansion Program • Loan Structure • Eligibility • SBA 504 Refinance Program • Loan Structure • Eligibility • Benefits of 504 • Sample Projects
SBA 504 Expansion Program Details & Eligibility Information
What is a “504”Loan? • One of two flagship SBA Loan Programs. It provides long-term, fixed-rate bond financing via the long-term bond market. • Partnership between Banks (aka “Third Party Lender”) and Certified Development Companies (CDC’s). • “504” Advantages: • A low down payment (usually 10%). • 10, 20 or 25 year terms, fully amortizing. • A fixed, below-market interest rate and fixed monthly payments. • A subordinated lien position behind the partnering bank. • The ability to finance project soft costs and most fees associated with obtaining a 504 loan.
Definition of a New Business • A business that is two years old or less. • A new single asset entity may be considered an EXPANSION of the company’s existing business if a guaranty by the existing business is pledged. • Change of ownership MAY be considered a New Business. • Note: SBA will consider change in ownership to be an existing business if the owner has past industry experience (case-by-case basis).
Special Use Examples ◊ Bowling Alleys ◊ Car Wash ◊ Gas Stations ◊ Hotels/Motels ◊ Farms ◊ Marinas ◊ Golf Courses ◊ Swimming Pools ◊ Wineries ◊ Hospitals/Surgical Centers ◊ Crematoriums ◊ Bldgs. w/in-ground lifts ◊ Warehouses w/50% or more in cold-storage ◊ Nursing homes & Assisted Living Facilities (This is not intended to be all-inclusive list)
Third Party Lender Loan (Bank) • Priority Lien on project assets. • Minimum term of 10 yrs. when 504 is 20 or 25 yrs. • Minimum term of 7 yrs. when 504 is 10 yrs. • Lender may reprice loan at any time. • Borrower negotiates the deal independently with the Bank. • ½% Bank Participation Fee on Bank’s permanent portion. This fee may be paid by the Bank, passed onto the Borrower or paid by the CDC.
SBA 504 Loan • Subordinate lien to Bank. • 10, 20 or 25 year debentures (based on useful life of assets financed). • Fees are included in the gross loan amount. • Declining prepayment penalty for the first 5 years on 10 yr. debentures; prepayment penalty for 10 years on 20 and 25 yr. debentures. • A 504 Loan is assumable if the buyer qualifies.
Borrower Equity • Cash • Land Equity • If project property purchased < 2 yrs. of application, value is based on cost. • If property purchased > 2 yrs., then value is based on “as is” appraised value. • Seller Note • The term of a seller note must = the 504 term if a lien on project assets is filed. • Other Financing • Lines of credit, other term loans including economic development financing. • Grant $$ and Gifts (requires gift letter).
Outlining Typical Project – 50/40/10 Use of Funds:Sources of Funds: Building Purchase $ 750,000 Bank $ 500,000 Improvements $ 100,000 SBA $ 400,000 Equipment $ 67,000 Equity $ 100,000 Refinanced Debt $ 50,000 Total$1,000,000 Related Fees Appraisal/Environ. $6,000 Architect $2,000 Transfer Tax $7,500 Title Insurance $7,500 Interim Loan Fees $5,000 Interim Interest $5,000 $ 33,000 Total Project Cost$1,000,000
Eligible Small Businesses The Definition of an Eligible Small Business is: • Operating for profit. • Located in the US, owned by US Citizens or Legal Permanent Residents. • Size standards—applicant and affiliates must not exceed: • Tangible net worth of ≤ $15 million & average net income after taxes for preceding 2 FY ≤ $5 million • Alternatively, 7a size standards may be used (based on revenues or employees, depending upon industry).
Eligible “504’ Project Costs • Owner-Occupied Real Estate • Land and Improvements • Existing Building—Borrower must occupy 51% • New Construction –Borrower must occupy 60% and permanently lease 20% (must occupy 80% within 10 yrs.) • Construction contingency up to 10% • Machinery & Equipment • New & Used – Minimum useful life of 10 yrs. • Can include costs to dismantle, transport and install M&E
Eligible “504’ Project Costs – Cont. • Furniture & Fixtures • Professional Fees: • Must be related to the project (i.e. title insurance, appraisals, environmental, etc.). • Interest and fees on interim Bank loan. • Refinance with Expansion: • Up to 50% of “New Money” can be included in the project as refinanced debt. Example: • $750,000 to purchase building + $250,000 for buildout = $1,000,000 in New Money. • Debt refinanced in 504 project may total $500,000.
SBA 504 Loan Limits • Max: Loan Amount $5,000,000 • Max: Small Manufacturer $5,500,000 • Max: 10% in Energy Consump. $5,500,000 • Max: Renewable Energy $5,500,000 • For Eligible Energy Public Policy Projects, the outstanding Gross Debentures issued for a borrower & affiliates may not exceed $16,500,000 in the aggregate. • Note: The $5,500,000 amount for each Project is not reduced by any other outstanding SBA 7a loan guaranties or SBA 504 loans that the borrower and its affiliates have received. Additionally, “Green 504 Loans” do not reduce the $5,000,000 limit for other “Non-Green” 504 Projects.
Job Creation Criteria • 1 job created or retained/$75K (2 yrs.) • 1 job created or retained/$120K – Manufacturer (2yrs.) • Enterprise, Empowerment, Opportunity Zones; Labor Surplus/$85K • Waived if project meets 1 of 5 Public Policy Goals or 10 Community Development Goals. • Community Development goals: (1) Improving, diversifying or stabilizing the economy of the locality;(2) Stimulating other business development; (3) Bringing new income into the community; (4) Assisting manufacturing firms; or (5) Labor Surplus Areas • Public Policy goals: (1) Revitalizing a business district; (2) Exports; (3) Woman-owned; (4) Veteran-owned; (5) Minority-owned; (6) Rural development; (7) Increasing productivity and competitiveness; (8) Modernizing or upgrading facilities to meet health, safety, and environmental requirements; (9) Assisting businesses due to Federal budget reductions, or (10) Reduction of rates of unemployment in labor surplus areas.
Interest Rates • Established at the time of the bond sale, after the project is complete and the Bank is fully disbursed. • Fixed for the full term of the loan. • 20 & 25 yr. debentures sold monthly; 10 yr. bonds sold every other month. • Current Effective Rates: • 25 yr. 4.741% - March 2019 • 20 yr. 4.586% - March 2019 • 10 yr. 4.628% - March 2019 (Note: “Funding” occurs approximately 45 - 60 days after completion of a “504” project)
SBA 504 Refinance Program Details & Eligibility Information
Eligibility Criteria • The 504 Debt Refinancing Program may only be used in a fiscal year in which the subsidy cost to the Federal government on making guarantees under the 504 Programs is zero. • In the 504 Debt Refinancing Program, each CDC’s new loan approvals during any fiscal year can’t exceed 50% of the dollars the CDC loaned under the 504 Loan Program during the previous fiscal year. SBA may waive this limitation for good cause.
Eligibility Criteria • The applicant has been in operation for 2 years preceding application; • Does not include new monies (expansion); • Must meet standard 504 requirements (i.e.: occupancy, size standards, etc.); • Multiple loans may be refinanced into one 504 project, providing they meet the criteria of “Qualified Debt”; • “Same Institution Debt” is eligible for refinance; • Cash-out for Eligible Business Expenses may be permitted.
Qualified Debt • Substantially all (85% or more) of the commercial loan proceeds were used to acquire an Eligible Fixed Asset; • Original debt benefited the small business concern; • Was incurred not less than 2 years before application; • Federal debt is ineligible (SBA 7a, 504, USDA, etc.); • Refinance of 1st Lien in an existing 504 project is ineligible; • Multiple loans may be refinanced into one 504 project, providing each meet the criteria of “Qualified Debt”; • Secured by Eligible Fixed Assets; • Borrower has been current (<30 days past due) for prior 12 months.
Eligible Business Expenses • Business expenses currently due or owed within 18 months after application date, including but not limited to payroll, rent, utilities, maintenance expense, inventory purchases, debt service payments, taxes, paydown of business line of credit, etc.
Refinance Program Fees & Rates • SBA 504 Refinance fees are the same as the SBA 504 Expansion Program fees. • SBA 504 Refinance Interest Rates: Slightly higher than the Expansion Program (+ 0.027%). • March 2019 Twenty year debenture: 4.619% • March 2019 Twenty-five year debenture: 4.772%
Loan to Value Limitations • 90% Maximum LTV: • For projects that only refinance Qualified Debt; • Borrower may pledge additional fixed assets or cash to meet the 90% LTV requirement. • 85% Maximum LTV: • For projects that include Eligible Business Expenses (EBE); • The Eligible Business Expense amount may not exceed 20% of the appraised value of the Eligible Fixed Asset securing the Qualified Debt. • Additional fixed assets MAY NOT be pledged to meet the LTV requirement.
Typical Project – No Cash Out Assumptions: • Appraised Value - $1,250,000 • Outstanding Debt - $1,000,000 • 504 Loan ≤ the Bank Loan and ≤ 40% of the project • THIS IS AN ELIGIBLE STRUCTURE
Typical Project – Cash Out Assumptions: • Appraised Value - $1,250,000 • Outstanding Debt - $812,500 • 85% LTV and Eligible Business Expenses ≤ 20% of Appraised Value • THIS IS AN ELIGIBLE STRUCTURE
Typical Project – Insufficient Equity Assumptions: • Appraised Value - $1,000,000 • Outstanding Debt - $1,250,000 • Must pledge $389,000 in other fixed assets to increase the project to $1,389,000 • THIS IS AN ELIGIBLE STRUCTURE
Benefits to the Bank • Use the program as a competitive advantage against variable rate loans. • Loan-to-value ratio of 50%. • May tolerate higher default risk and increase Bank’s comfort level with certain industries. • Ability to finance larger and/or multiple projects while staying within your legal lending limit. • Obtain or maintain customer relationship and deposits. • Community Reinvestment Act (CRA) Credit.
Benefits to the Bank, cont. • The Bank does not have to obtain an SBA guaranty, as in SBA 7(a) lending. • CDC handles all SBA documents. • In case of default, Bank does not interface with SBA. • Appraisal can be as low as 95% of the total project costs. • Creative structures may permit 100% financing. • Use the 504 Refinance program to reduce your Bank’s industry concentrations by refinancing your conventional loans.
Benefits to the Borrower • Below-market fixed interest rates. • Low down payment preserves working capital (usually 10%). • Offsets interest rate risk. • Extended amortization provides lower monthly payment. • Improved cash flow coverage. • Borrower can finance most closing fees. • Lower fees compared to 7A program for similar sized projects. • Collateral is typically limited to project assets, and the SBA permits flexibility with appraisal shortfalls (up to 105% LTV w/o additional collateral)
Successful Bank Strategies • Use the 504 for your best customers (not just the marginal deals). • Offer a 504 as a structuring advantage before your competition does– it builds loyalty. • Adjust incentive program for loan officers so there is an equal incentive to use the 504 program. • Develop a relationship with your CDC; loan officers can accompany you on customer calls to answer technical questions. • Bank and CDC share information to expedite processing and to minimize the need the for customers to duplicate information. • Agree on structure before you get approvals in place. • Use the CDC as potential source of other economic development financing.
