S ERVICE E XPERTISE E XPERIENCE D EPENDABILITY

1. The SBA 504 Loan Program SERVICE EXPERTISEEXPERIENCEDEPENDABILITY

2. SEED’s Loan Programs Currently, SEED administers three loan programs: • SBA 504 Loan Program – Loans up to $5.5 million for real estate and heavy machinery and equipment. • Small Loan Program – Loans up to $250,000, usually as part of a larger project, with flexible use of funds. • Micro Loan Program – Loans up to $50,000, flexible use of funds.

3. Where is SEED’s 504 Geographic Coverage ? • SBA 504 Program: All of Massachusetts and Rhode Island (except Washington County)

4. What is the SBA 504 Loan Program? • It is the Small Business Administration’s (“SBA”) “economic development financing program.” • Loans are provided to expanding small businesses to aid in job creation. • SBA loans are guaranteed by the Federal Government.

5. Goal of the Presentation • General understanding of the SBA 504 Loan Program – from origination to servicing! • Learn about the 504 Program features and benefits. • For even more detail, including forms, regulations and the Standard Operating Procedure (SOP) Manuals ~ visit • www.sba.gov/for-lenders

6. The Role of SEED Corporation • The SBA 504 Program is administered through SBA Certified Development Companies (CDC’s) ~ like SEED Corporation that was formed in 1982 when the program first began; • SEED underwrites, packages, closes and services SBA 504 loans on behalf of the U.S. Small Business Administration.

7. Selling the 504 Option • If the answer to any of the following questions is yes, then give the customer an introduction to SBA 504: • Is working capital important to the success of the business? • Is long-term fixed rate important for cash flow? • Is a low down payment important? • Does the business want protection in the event of a devaluation of real estate?

8. SBA 504 Loan Program Benefits to the Borrower: • Financing for a fixed asset project with as little as a 10% injection; • Long-term, fixed rate funds…enhancing cash flow for business; • SEED’s interest rate as of March 2017 is: - 4.89% on a 20-year debenture - 4.53% on a 10-year debenture

9. SBA 504 Loan Program Benefits to the Borrower (cont.): • Ability to include soft costs, equipment and furniture and fixtures in a real estate project … enabling businesses to minimize out of pocket expenses and preserve cash; • Lower down payment conserves working capital.

10. SBA 504 Loan Program Benefits to the Bank: • Bank’s maximum loan-to-value is typically 50%, minimizing risk and improving liquidity; • Ability to provide 90% financing to a small business client; • Program allows reliance on financial projections – for startups and businesses with inadequate historic cash flow;

11. SBA 504 Loan Program Benefits to the Bank (cont.): • The bank’s first mortgage can be sold in the secondary market for a premium. • The CDC is responsible for all of the paperwork!!

12. What is needed for SEED to approve a 504 request? • Purchase & Sales Agreement for project property, cost estimates for any construction or renovation projects and equipment estimates, if applicable; • Three years of tax returns on the business and interim financial statements if beyond 120 days of the company’s FYE; • Information on the borrower’s existing debt.

13. What is needed for SEED to approve a 504 request? • Current personal financial statement and two years of personal tax returns for each principal of the business (20% or more ownership); • Property appraisal and environmental assessment can be submitted to SEED after approval. • No Application Form is required!We essentially use the same underwriting documentation as the bank!

14. Use of Funds • Fixed-Asset Acquisition or Expansion: • Purchase land and construct new buildings; • Purchase and/or renovate existing buildings; • Construct an addition to an existing building; • Construct or remodel buildings on leased land; • Acquire / install machinery and equipment;

15. Use of Funds (cont.) • Soft costs related to the project (appraisal, environmental assessment, interim interest, and professional fees); • Refinance existing eligible fixed asset debt up to 50% of new expansion project; • Available June 2016! Direct Debt Refinance up to 90% LTV; excluding any government financing (SBA 504, 7a, USDA);

16. Use of Funds (cont.) • Ineligible use of funds: • Purchase of trucks, autos and airplanes; • Working capital; • Franchise fees; • Management fees and advertising; • Incorporation / organization costs; • Contact SEED (508) 822-1020 for Loan Structure!

17. Project Size Requirements • Minimum Amount of 504 Loan: • $25,000 – SEED calculates costs and benefits for 504 projects under $300,000 and may use other loan funds • Maximum Amount of 504 Loan*: • Up to $5 million for most businesses • Up to $5.5 million for manufacturers and projects generating renewable energy or fuels *There is no maximum limit to project size

18. Job Requirements • Borrowers must create one (1) job for every $65,000 funded (SBA Portion) • Exceptions: • Manufacturing businesses provides one (1) job for every $100,000 funded (SBA Portion); • Projects that meet any of the SBA Public Policy Goals or Community Development Goals.

19. Public Policy Goals • Not required to create one (1) job for each $65,000 • Revitalizing a business district of a community (a written revitalization/redevelopment plan); • Expanding exports; • Expanding minority-owned, woman-owned or veteran-owned businesses;

20. Public Policy Goals (Cont.) • Not required to create one (1) job for each $65,000 • Aiding rural development; • Energy-consumption reduction of at least 10% or sustainable design or equipment and process upgrades; • Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports);

21. Public Policy Goals (Cont.) • Not required to create one (1) job for each $65,000 • Modernizing or upgrading facilities to meet health, safety, and environmental requirements; • Assisting businesses in, or moving to, areas affected by Federal budget reductions (base closings within 10 years);

22. Community Development Goals • Not required to create one (1) job for each $65,000 • Improving, diversifying or stabilizing the economy of the locality; • Stimulating other business development; • Bringing new income into the community; • Assisting manufacturing firms; • Assisting businesses in Labor Surplus Areas as defined by the Department of Labor;

23. Not Eligible for 504 Funding • Non-Profits; • Lending Institutions; • Life Insurance Companies; • Private Clubs; • Speculative Investment; • Non-owner occupied buildings;

24. Not Eligible for 504 Funding (Cont.) • Gambling concerns; • Businesses engaged in promoting religion; • Cooperatives (exception for some producer coops); • Political or lobbying services; • Businesses located in a foreign country or owned by a non-resident alien; • Businesses selling through pyramid plans;

25. Not Eligible for 504 Funding (Cont.) • Businesses engaged in sales or services of a prurient sexual nature; • Businesses with prior loss to the government; • Relocation of a small business causing a net deduction of one third or more of its workforce or a substantial increase in area unemployment.

26. Structure of a Typical $1 Million Project Loan % of EntityAmountProjectSecurity Lender $500,000 50% 1st Mortgage SEED/SBA $400,000 40% 2nd Mortgage Borrower $100,000 10%* TOTAL: $1,000,000 100%  Total Debenture: $409,000 ($8,600 rounded up) (Up front fees of 2.15% on $400,000; included in the debenture) * Projects that involve a new business and/or special purpose building will require an additional 5-10% from the borrower.

27. Typical Structure for Established Business

28. Typical Structure for Special Purpose Building OR Start-Up

29. Typical Structure for Start-Up BusinessAND Special Purpose Building

30. Eligible Project Costs • Land $ 200,000 • Construction 600,000 • Contingency (10%) 60,000 • Site Preparation 10,000 • Machinery/Equipment 50,000 • Furniture/Fixtures 20,000 • Soft Costs ~ • Permits 2,500 • Architect/Engineer 25,000 • Appraisal 4,000 • Environmental Report 2,500 • Title Insurance 1,000 • Interim Interest & Fee 25,000 • TOTAL $1,000,000 50% Bank $500,000 40% CDC $400,000 10% Owner $100,000 100% $1,000,000

31. Fees Charged by the CDC Financed as part of 504 loan – 2.15% of net debenture CDC Processing Fee: 1.50% SBA Guarantee Fee: 0.00%Paid to SBA- one time fee  Underwriting Fee: 0.40% Covers expense of pooling & underwriting 504 debenture, paid directly to Merrill Lynch Funding Fee: 0.25% Paid to Central Servicing Agent (Price Waterhouse) Total: 2.15%  Effective 10/1/15, the SBA Guarantee fee has gone to zero from 0.50%!

32. Other Requirements • Occupancy: • Business must occupy at least 51%; • Business must initially occupy at least 60% of a newly- constructed building and 80% within 10 years. • Jobs: • Create/Retain one job for each $65,000 borrowed through the 504 Program unless the project meets a Public Policy Goal • Manufacturing Businesses- one job per $100,000. ;

33. SBA Debt Refinance Program (Returned 6/24/2016) Eligible Debt • Secured by fixed assets and be in place at least two years; • Borrower must have been in business two years and 85% of the loan must have been for Real Estate or Equipment; • Any debt being refinanced must have been current for the last 12 months.

34. SBA Debt Refinance Program (Returned 6/24/2016) Eligible Costs • Owner-occupied commercial real estate or equipment (not Federal debt); • Other debt secured by the same assets (i.e. line of credit); • Closing Expenses; • Eligible business expenses that do NOT exceed 25% of the value of the assets, including utility bills, rent, salaries, inventory, etc.

35. SBA Debt Refinance Program (Continued) Loan-to-Value (LTV) • LTV of 90% for commercial mortgage and other debt only (additional collateral may be pledged to achieve 90%); • LTV of 85% when eligible business expenses are included (eligible business expenses are limited to 25% of the value of the fixed asset; additional assets CANNOT be used to increase the amount of the “cash out”).

36. SBA Debt Refinance Program (Continued) --Loan-to-Value (LTV) Fees/Costs • All regular 504 costs apply and are financed in the 504 loan; • Third Party Lender fee of 0.5% still applies; • The ongoing fee is slightly higher (0.797% vs. 0.697%) which has a minor (0.10%) impact on the effective rate.

37. Ownership of Building • By the Operating Company (OC); • By an Eligible Passive Company (EPC) • Individuals • New Corporation • Partnership • Limited Liability Company • Trust

38. Guarantees Required for any principal with 20% ownership or more in Operating Company (OC) or Eligible Passive Company (EPC).

39. Size Standards *Size standards are increased by 25% in labor surplus areas Business – when combined with affiliates must: • Have less than $15 million in tangible net worth; • Have less than $5 million in net income after taxes (average for last 2 years); ~OR~ Use 7A standards as an alternative.

40. What’s An Affiliate? Changes effective 7/27/16 (1) Affiliation based on ownership Ownership or power to control more than 50% of the concern’s voting equity; If no majority interest – “SBA will deem the BOD, President or CEO (or other officers, managing members or partners) to be in control”; Also minority owners if they hold the right through negative control within the charter or by-laws.

41. What’s An Affiliate? Changes effective 7/27/16 Major Change: Franchise/License Agreements: SBA does not find the mere existence of a franchise or license creates affiliation ~ so as long as they: Have a right to profit from its efforts; and Bears the risk of loss commensurate with ownership.

42. Appraisals • SBA requires a real estate appraisal if the estimated value of the project is greater than $250,000; • All appraisals must be addressed to both the Bank and the U.S. SBA and be consistent with Uniform Standards of Professional Appraisal Practice (USPAP); • Be performed by a state certified or state licensed appraiser and for all the loans over $1,000,000 the appraiser must state certified;

43. Appraisals (Cont.) • For new construction or substantial renovations, appraiser must estimate “as complete” value and recertify at completion --CDC must obtain a statement from appraiser indicating the project was built with only minor deviations from plan; • If a going concern value is requested due to special purpose nature of the building, appraiser must allocate separate values to the individual components --When collateral is special purpose, the appraiser must be experienced in the particular industry;

44. Appraisals (Cont.) • An appraisal must be submitted with an application if relying on owner’s equity for injection.

45. Environmental Reports If findings and over $150,000, then at a minimum – Environmental Questionnaire and Records Search with Risk Assessment (RSRA) is necessary Questionnaire Only -- • If 504 loan amount is up to and including $150,000; • No match to an environmentally sensitive industry; • Environmental Questionnaire results in no findings;

46. Environmental Reports (Cont.) Environmental Questionnaire and Records Search with Risk Assessment: • Unlikely there is environmental contamination; • Risk Assessment states “Low Risk”; • If “Elevated Risk” or “High Risk” – Phase I required;

47. Environmental Reports (Cont.) Transactional Screening Analysis (TSA) Required: • Environmental Professional must conclude that no further investigation is warranted (reliance letter required); • If opinion warrants further investigation, a Phase I must be obtained.

48. Phase I Environmental Site Assessment (ESA) Results • If “no further investigation warranted,” Phase I report may be submitted to SBA for approval including the SBA Reliance Letter; • If report’s conclusion is “further investigation warranted” the CDC must proceed as recommended by the Environmental Professional; SBA will require compliance with all Environmental Professional recommendations; • Phase II ESA or Supplemental Reports Required.

49. Phase II Environmental Site Assessment (ESA) Results • If “no further investigation warranted,” Phase II report may be submitted to SBA for approval including the SBA Reliance Letter; • If report’s conclusion reveals contamination, the CDC will need to determine if they will proceed with the project; • CDC will determine whether disbursement is appropriate according to subparagraph G, Pages 266-269 of SBA SOP 50 10 5(I).

50. The 504 “Process” • Borrower or the bank submits a loan package to SEED; • SEED conducts preliminary review and works with bank and client; • The loan request is presented to SEED’s Loan Review Committee (meeting or email); • A commitment letter is sent to the borrower with a copy to participating bank; • Loan is packaged and forwarded to SBA Central Office in Sacramento, California for issuance of the Authorization.