Date post: | 15-Apr-2017 |
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SBA 504 LENDER WORKSHOP…
PART I:OBTAINING SBA LOAN APPROVAL
About Us
Our Goals for This Session
Understanding what it takes to obtain an SBA 504 approval
How to make the process as fast and efficient as possible
Section 504 CDC Loan Program Key Players:
US Small Business Administration Certified Development Companies Third-Party Lenders Small Business Applicant
Section 504 CDC Loan Program Began October 1980 Section 504 added to the Small Business
Investment Act in 1986 Provides access to fixed rate, long-term
funding in the public capital markets not otherwise available to small business
29 years of history have led to more than $63 billion in 504 loans
What is 504?
Purpose:
To foster economic development, create or preserve job opportunities and stimulate growth, expansion and modernization of small businesses
What is 504?
Definition: The 504 Loan Program is economic development financing specifically designed to stimulate private sector investment in long-term fixed assets to increase productivity, create new jobs, and increase the local tax base; the stimulus is provided by making long-term, low down payment, reasonably priced fixed-rate financing to healthy and expanding businesses which have the highest probability of successfully creating new jobs and competing in the world marketplace.
Economic Development
Job Goals Community Development Goals Public Policy Goals
Job Goals One new full-time job created per $65,000 of
the SBA loan Job retention can be used if reasonably show
job cost to community $75,000 in special geographic area $100,000 if a small manufacturer Borrower has two years to meet job creation
goal
Community Development Goals Improving, diversifying or stabilizing the
economy of the locality Stimulating other business development Bringing new income to the community Assisting manufacturing firms Assisting businesses in Labor Surplus Areas
Public Policy Goals Revitalizing a business district Expanding exports Expanding Minority Enterprise Development Aiding rural development Enhancing economic competition Restructuring because of federally-mandated
standards or policies
Public Policy Goals Assisting businesses in or moving to areas
affected by Federal budget reductions Veteran-owned businesses Women-owned businesses The project is energy-saving Reduction of rates of unemployment in labor
surplus areas
Project Costs – What’s Eligible?
Five Components to eligible project costs: Cost of acquiring a fixed asset
Cost of building and building improvements
Professional fees
Other expenses
Permissible debt refinance
Ineligible Project Costs
The borrower can and will incur ineligible project costs in connection with the project such as: Third-Party Loan fees
Attorney’s fees incurred in closing the loans
Franchise fees
Brokers fees
Cost of interior finishing space to be leased to a third party
These cannot be part of the project or paid by the 504 loan
An Eligible Borrower Must: Be an operating business
Be organized for profit
Use and/or occupy the project property
Be a small business under size requirements
In CDC’s geographic jurisdiction
Project must have a “sound business purpose”
Demonstrate a need for desired credit
*Eligibility determined at time of application
Ineligible Types of Businesses The SBA lists 20 types of businesses as
ineligible for 504 loans. The most common are: Non-Profits
Passive Businesses
Businesses with an associate of poor character
Prior government default
Non-US Citizen
Size Standards - 504 Less than $15 million tangible net worth Less than $5 million average net income
after taxes for previous two years 7(a) size standards can also be used
-25% higher allowed if project in a Labor Surplus Area
-Size determined as of date of the loan application
-Size determination is for applicant and all affiliates
Size Standards – 7(a)
Size Standards - Affiliations
Concerns and entities are affiliates of each, when one controls or has the power to control the other, or a third party/parties controls or has the power to control both
Size Standards - Affiliations Affiliation can arise through:
Stock ownership Agreements to merge Common management Identity of interest
Newly organized concern rule
Joint ventures Franchise or License Agreements
Franchise & License Agreements
Franchise & License Agreements Review of Franchise Agreements to determine
if there is affiliation is complex To speed up the approval process, a third
party, Frandata, has developed the franchise registry, where franchisors can be “pre-approved” for eligibility review
Franchise/License agreements must be cleared by SBA prior to application submission
Franchise & License Agreements
SBA 504 Loan Structure
Financing Structure
Single Purpose or Start-Up: 50/35/15
Single Purpose & Start-Up: 50/30/20
Permanent/Interim Loan Borrower Equity
EPCs & Operating Companies General Rule: SBA business loans are only
made to operating businesses that own and use the business property
The only exception is for an SBA business loan to allow an Eligible Passive Concern (EPC), which in turn acquires the project property that is leased to the Operating Company (OC)
The ultimate beneficiary of the SBA loan is the operating small business
EPCs & Operating Companies The structure can be EPC/Borrower and OC
Guarantor or EPC Borrower and OC Co-Borrower
Loan must be structured as Co-Borrower when any other assets acquired with the 504 loan are owned by the OC
There can be multiple OCs in a 504 project, but only one EPC
EPCs & Operating Companies There must be a lease between
EPC and OC that requires: Term must be at least equal to loan
term Rent paid must be same as loan
payments Lease must be for entire property
EPCs & Operating Companies Occupancy
51% - 49% Existing facilities 60% - 40% New construction
For new construction, 20% can be leased long term and 20% temporarily. OC must begin to expand into the 20% temporary space within three years and occupy 80% of the building within 10 years
Guarantors If EPC/OC Structure, the OC must guarantee
Each stockholder owning 20% or more must guarantee the loan
Each spouse owning 5% or more must guarantee the loan when combined ownership interest of both spouses is 20% or more
6-Month Rule Applies Any person subject to the personal guarantee requirements 6 months prior to
the date of the loan application would continue to be subject to the requirements even if that person has changed his or her ownership interest to less than 20%. The exception to this rule would be a 100% relinquishing of ownership.
Loan Terms
SBA 20-year or 10-year term
Third-Party Lender If SBA is 20-year, must be at least 10-year
term
If SBA is 10-year, must be at least 7-year term
504 Loan Amounts
Minimum amount for a 504 debenture is $25,000
Maximum amount is $5,000,000 or $5,500,000 for energy reduction/production projects as well as manufacturing firms
Application
1. Credit
2. Guarantors
3. Eligibility
4. Project Costs
5. Collateral
6. Other
Application
Application - Credit
Three Years’ Business FTR IRS Form 4506-T
Interim Financials Income Statement Balance Sheet Aging A/R & A/P
Application – Credit
Debt Schedule Credit Reports New Business
12-Month Cash Flow Two Years’ Projected Income
Statement
Application - Guarantors
One-Year Personal FTR IRS Form 4506-T
Personal Financial Statement SBA Form 413
Credit Reports
SBA Form 413
Application – Eligibility
SBA Form 912 on each: Officer & Director (regardless of ownership)
Proprietor, Partner & Stockholder with 20% or more ownership in Operating Company
Owner with 20% or more ownership in EPC
SBA Form 912
Application – Eligibility
CAIVRS Applicant, Guarantors, & Affiliates
Affiliate Information Ownership or Management Control Last Two Years’ FTRs Statement why it is not affiliated
Application – Eligibility
Franchise Approval Pre-Application Includes Affiliated Franchises
Alien Clearance – USCIS Historic Approval – if applicable
Application – Project Costs
Signed Valid Purchase Contract Contractor Estimates Professional Fees
Application – Collateral
Appraisal Name SBA as Intended User Two of Three Methods Utilized Value must be at least 90% of Total
Project Cost, except in the case of a change of ownership
Application - Collateral
Environmental Questionnaire and RSRA Phase I Phase II Gas Stations Taking Other Collateral
Application – Other Items
Bank Commitment Letter Requires SBA Language with separate
refinance language, if applicable
Organizational Documents and FEINs – OC and EPC
Refinance Documents HCDC Forms
504 Loan Fees
$1,000,000 Project
$500,000 Third-Party Lender
$400,000 SBA Net Debenture
$100,000 Equity
$1,000,000
504 Loan Fees$400,000 Net Debenture
$0 SBA Guarantee Fee
$1,000 Fiscal Agent Fee
$6,000 HCDC Processing Fee
$1,668 Underwriter Fee
$5,640 HCDC Closing Costs
$414,308
$692 Balance to Borrower
$415,000 Gross Debenture
504 Loan Fees
Third-Party Lender charges its own fees & closing costs, including a one-time SBA Participation Fee of 0.5% of the TPL loan amount
$2,500 in this example Only paid if TPL is Senior Lien
Holder
Submission & Timing
HCDC Loan Committee OH & IN – First and third Thursday of
each month KY – second Thursday each month
Submission & Timing
SBA Approval Process Credit (Loan Authorization) Appraisal Environmental
For More Information…
Andy YoungVice President & Senior Loan [email protected] HowardLoan [email protected]
Mike CroweLoan [email protected]
@theHCDC