The SBA 504 Loan Program

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• The SBA 504 Loan Program

www.seedcorp.com
Revised by SEED Corp. 5/13
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What is the SBA 504 Loan Program?

• It is the Small Business Administrations
  economic development financing program.
• Loans are provided to expanding, small
  businesses to aid in job creation.
• SBA loans are guaranteed by the Federal
  Government.

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Goal of Presentation
General understanding of the SBA 504 Loan
Program from origination to servicing, and504
Program Features Benefits
Visit www.sba.gov/for-lenders For Forms,
Regulations and Standard Operating Procedure
Manuals
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The Role of SEED Corporation

• The SBA 504 Program is administered through
  SBA Certified Development Companies (CDCs)
  like SEED Corporation.
• SEED underwrites, packages, closes and
  services SBA 504 loans.

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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 a 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?

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Benefits to the Borrower

• Up to 90 financing for a fixed asset project.
• Long-term, fixed rate funds enhancing cash
  flow for business.
• The SEED effective rate as of 4/13 is 4.16 on
  a 20-yr debenture, and 3.29 on a 10-yr
  debenture.
• Ability to include soft costs, equipment and
  furniture and fixtures. . .enabling business
  to minimize out of pocket expenses and
  preserve cash.
• Lower down payment conserves working capital.

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Benefits to the Bank

• Banks maximum loan-to-value is typically 50,
  minimizing risk and improving liquidity.
• Ability to finance projects with as little as
  10 injection.
• Program allows reliance on financial projections
  for startups and businesses with inadequate
  historic cash flow.
• The banks first mortgage can be sold in the
  secondary market for a premium.
• The CDC is responsible for all of the paperwork!

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Whats needed for SEED to approve a 504 request?

• Purchase sales agreement for project
  property and cost estimate for
  construction/renovation projects.
• Three years of tax returns and financial
  statements for the business.
• Information on the borrowers existing debt.

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Whats needed for SEED to approve a 504 request?

• Current personal financial statement and
  2 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!

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Use of Funds

• Fixed-Asset Acquisition or Expansion
• Purchase land construction of new buildings.
• Purchase and/or renovate existing buildings.
• Construct an addition to an existing building.
• Refinance existing eligible fixed asset debt up
  to 50 of new expansion project.
• Acquire/install machinery equipment.
• Construct or remodel buildings on leased land.
• Soft costs related to the project (appraisal,
• environmental assessment, interim interest,
  and professional fees).

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Use of Funds (Cont.)

• Ineligible use of funds
• Debt refinancing(if there are no expansion
  funds)
• Purchase of trucks, autos and airplanes
• Working Capital
• Franchise fees
• Management fees and advertising
• Incorporation / organization costs

• Contact SEED at [phone] for Loan
  Structure!

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Project Size Requirements
Minimum Amount of 504 Loan 25,000
There is no maximum limit to project size.
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.
SEED Calculates costs and benefits for 504
projects under 300,000 and may use other
program funds.
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Job Requirements
Provide one job for every 65,000 funded (SBA
504 Portion)

• Exceptions
• Manufacturing businesses provide one job for
  every 100,000 funded (SBA 504 portion).
• Projects that meet any of the SBA Public
  Policy Goals or Community Development Goals.

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Public Policy Goals
Not Required to Create one 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.
• Aiding rural development.
• Energy-consumption reduction of at least 10
• or sustainable design or equipment and
  process
• upgrades.

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Public Policy Goals (Cont.)
Not Required to Create one job for each 65,000

• Increasing productivity and competitiveness
• (retooling, robotics, modernization,
  competition with imports).
• 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).

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Community Development Goals
Not Required to Create one 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.

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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 (exception for some producer coops)

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Not Eligible for 504 Funding (Cont.)

• Political or lobbying services.
• Businesses located in foreign country or owned
  by a non-resident alien.
• Businesses selling through pyramid plans.
• 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.

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Typical Structure for Established Business
SBA 504 Loan - 40
Bank - 50
Owners Equity 10
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Typical Structure for a Special Purpose Building
OR Start-Up
SBA 504 Loan - 35
Bank - 50
Owners Equity 15
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Typical Structure for Start-Up Business AND
Special Purpose Building
SBA 504 Loan - 30
Bank - 50
Owners Equity 20
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Structure of a Typical 1 Million Project
Loan of Entity Amount Project
Security Lender 500,000
50 1st Mortgage SEED/SBA 504 400,000
40 2nd Mortgage Borrower
100,000 10 TOTAL
1,000,000 100 Total Debenture 411,000
(400 back to client) (Up front fees include
2.65 on 400,000) Projects that involve a
new business and/or special purpose buildingwill
require additional 5-10 from the borrower.
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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
Any costs incurred within 9 months prior to
submission to SBA are eligible toward total
project costs
Nine month rule being contemplated for removal
(in comment period).
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Fees Charged by CDC
Financed as part of 504 loan 2.65 of net
debenture
CDC Processing Fee (SEED)
1.50 Underwriting Fee
0.40 Covers expense of pooling
underwriting 504debenture paid directly to
Merrill Lynch. Funding Fee 0.25 Paid
to Central Servicing Agent (Wells Fargo). SBA
Guaranty Fee 0.50
Total 2.65
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Program Requirements
Occupancy

• Existing Building
• Business must occupy at least 51.
• - may lease out up to 49

• Newly Constructed Building
  
• - Business must initially 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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Guarantees

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

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Size Standards

• 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 yrs)
• or
• Use 7A size standards as an
  alternative.

There is no limitation on annual sales volume
Size standards are increased by 25 in labor
surplus areas.
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Liquid Personal Resources
Excess Personal Resources Must Be Injected into
the Project Prior to Disbursement of any SBA
Financing

• If the Total Financing Package
• Is 250,000 or less, liquid personal assets in
  excess of TWO TIMES the Total Financing
  Package or 100,000, whichever is greater . . .

Currently under comment period for removal from
the program
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Liquid Personal Resources (Cont.)

• Is between 250,001 and 500,000, liquid
  personal assets in excess of ONE AND ONE
  HALF TIMES the Total Financing Package or
  500,000, whichever is greater . . .
• Exceeds 500,000, liquid personal assets in
  excess of ONE TIME the Total Financing
  Package, or 750,000, whichever is greater.

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Appraisals

• When more than 100,000 of 504 loan proceeds
  are
• used for real estate transactions.
• 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 loans over
  1,000,000, the appraiser must be state
  certified.

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Environmental Reports

• 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.
• If findings and over 150,000 then, at a
  minimum Environmental Questionnaire
  Records Search with Risk Assessment is
  necessary.

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Environmental Reports (Cont.)

• Environmental Questionnaire Records Search
• with Risk Assessment
• Unlikely there is environmental contamination.
• Risk Assessment states Low Risk.
• If Elevated Risk or High Risk Phase I
  required.

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Environmental Reports (Cont.)

• TSA Required
• (Transactional Screening Analysis)

• Environmental Professional must conclude
  that no further investigation is warranted
  (Reliance Letter required).
• If opinion warrants further investigation, a
  Phase I must be obtained.

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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 reports 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.

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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 reports conclusion reveals contamination,
  the CDC will need to determine if they will
  proceed with project.
• CDC will determine whether disbursement is
  appropriate according to subparagraph G, Pages
  323-326 of SBA SOP 50 10 5(E).

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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 SEEDs Loan
  Review Committee (meeting or e-mail).
• 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.

Three day approval process
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The 504 Process

• SEED is an Abridged Submission Method (ASM)
• lender, and submits required forms to SBA
  plus
• Purchase Sale Agreement
• Construction Cost Estimates
• Bank Commitment Letter
• SBA approves ASM SBA 504 loans within 3 days
• assuming all eligibility requirements are
  met, and
• the paper work has been filled out properly.
  
• Potential process delays Franchise reviews
  912 criminal clearances INS (Immigration)
  confirmations and gasoline jobber
  agreement reviews.

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The 504 Process

• Bank closes on permanent loan and bridge loan.
• SEED/SBA payoff the banks bridge loan in 90
  days on turnkey projects or after the project
  is completed (construction renovation
  projects).
• SBA Authorization (commitment) is valid for
  four years (48 months).

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Banks Permanent First Mortgage

• Permanent financing must be for at least
  10 years (on a 20-year debenture) with no
  balloon payments during that time.
• Interest rate on the banks mortgage is set by
  bank, and can be fixed or float.
• Bank can charge points.
• Half of the one-time SBA fee of 0.5 (or 0.25)
  
• on the banks first mortgage is currently
  being
• paid by SEED up to 17,187 on a 13.75
  million project.

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Interim Loan (Bridge Loan)

• Used to provide small businesses with financing
  
• needed since SBA 504 closing always occurs
  at least 60 days before the debenture sale.
• Used to facilitate change of ownership within
• time frame specified in the P S Agreement.
• Used to finance construction and/or
  improvements to property if applicable.
• Bank makes disbursements and supervises
  construction.

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Legal Fees
Closing costs are financed into the gross
debenture paid to CDCs closing attorney

• Legal Fee Maximum of 2,500
• Other Eligible Closing Costs
• Title Insurance
• Recording fees
• Flood Insurance
• Filing fees and title searches
• Surveys

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Whats New?
Among the proposed program changes are

• Eliminating the personal resource test
• Revising the rule of affiliation (50 ownership
  vs.
• 20 ownership in order to be part of the size
  
• standard calculation) and
• Eliminating the nine-month rule for the 504
  loan program.

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Whats New? (cont.)
New Players

• Wells Fargo is now the Central Servicing Agent
  (March 25, 2013)

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Loan Rates

• Debenture Rate
• Note Rate
• Effective Rate

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Debenture Rate
Negotiated by Underwriters, DCFC the U.S.
Government

• Based on current market conditions at the
• time the debenture is sold.
• Paid to bond investors on semi-annual basis.

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Note Rate

• Rate stated on the note between borrower CDC.
• Amount used in calculating monthly payments.
• Slightly higher than debenture rate as it is
  paid on
• a monthly basis rather than semi-annually.

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Effective Rate
Rate the borrower actually pays Note rate
(as of 4/13 Sale) 2.118
Plus Fees Annual Central Servicing Agent Fee
0.100 CDC Servicing Fee (SEED .875 SBA
.125) ? 1.000 SBA Fee
0.937 Total Fees 2.037 SEEDs
Effective Rate (As of 4/13) 4.155
? SBA Required Servicing Fee - This fee can go
up to 1.5. CDCs Servicing Fees vary and impact
the clients effective rate!
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Simultaneous SBA 504 Closing with Bank Closing

• Project is turnkey does not involve
  construction or setting up of heavy
  machinery and equipment.
• Bank and SBA 504 documents are signed at the
  same time to simplify process for bank and
  client.
• A follow up list of items may be needed prior
  to funding and bank reimbursement.

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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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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.
• Borrowers financial statements must be current
• within 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.

Please Note It can take up to 3 months to
fund the 504 Debenture
once project is completed
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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 Borrowers organizational structure.
• Adverse financial change in the operating
  company.
• Lawsuit, divorce or other legal issues.
• Certificate of Occupancy.

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Prepayment
First Half of 20 year Debenture
Prepayment Estimate Prepayment Estimate Prepayment Estimate
Based on April 2013 Funding Based on April 2013 Funding Based on April 2013 Funding


Year of Principal Outstanding
1 100 102.12
2 90 101.91
3 80 101.69
4 70 101.48
5 60 101.27
6 50 101.06
7 40 100.85
8 30 100.64
9 20 100.42
10 10 100.21
After 10 0 100.00

Prepayment is based on the negotiated rate plus principal in year one and 10 less Prepayment is based on the negotiated rate plus principal in year one and 10 less Prepayment is based on the negotiated rate plus principal in year one and 10 less
each year after.
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Project Profile 10 Down Pmt (Standard)

• Personnel Company Acquisition of Existing
  Building
• Purchase of Land Building 925,000
• Improvements 148,000
• Soft Costs 27,000
• 1,100,000
• Bank (50) 550,000
• SBA 504 (40) 440,000
• Client (10) 110,000
• Client has been in business over two years, and
  is purchasing a 10,000 sq ft multi-purpose
  building for expansion (will lease 40).
• Collateral Coverage is based on 90 Loan to
  Value
• (appraised on as completed basis).

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Project Profile 15 Down Pmt (New Owner)

• Purchase of Existing Restaurant (New Owner)
• Considered new operation
• Building Purchase Price 1,200,000
• Bank (50) 600,000
• SBA 504 (35) 420,000
• Client (15) 180,000
• Client has historical restaurant experience.
• Collateral Coverage is 85 Loan to Value.
• Building must appraise adequately or additional
  funds are considered goodwill and must be
  satisfied outside the 504 transaction.

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Project Profile 15 Down Pmt (Special Purpose)

• Acquisition of a Special Purpose Bldg Gas
  Station
• Building Purchase Price 675,000
• Bank (50) 337,500
• SBA 504 (35) 236,250
• Client (15) 101,250
• Client is a three year operator of this leased
  location and wants to purchase this special
  purpose facility.
• Collateral Coverage is 85 Loan to Value on a
  special-purpose building.

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Project Profile 20 Down Payment(Special
Purpose and New Owner)

• Start-Up Hotel
• Purchase of Land 1,500,000
• Building Construction 5,000,000
• FF E 950,000
• Professional Fees 70,000
• Contingencies/Interim Interest 380,000
• 7,900,000
• Bank (50) 3,950,000
• SBA 504 (30) 2,370,000
• Client (20) 1,580,000
• Client is starting up a flag hotel.
• Collateral Coverage is based on 80 Loan to
  Value on a start up, single purpose real
  estate project (includes furniture,
  fixtures equipment).

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Why YOU Should Consider a SEED/SBA 504 Loan

• Up to 90 financing for fixed asset project.
• Lower down payment for client.
• SEED pays half of the .5 bank fee (0.25).
• Long-term, fixed rates for 10 or 20 years.
• SEED provides quick efficient turn around(SBA
  approved for Abridged Submission).
• SEED provides loans up to 200,000 at 5 fixed to
  replace the down payment.
• SEED is responsible for all the paperwork.

Call [phone] or Visit www.seedcorp.com