Lender Summit
August 19, 2011
The Small Business Administration (SBA) 504 Loan
Major differentiations between 7a and 504 loans:
Delivered by certified development companies (CDC). All shapes
and sizes of CDC’s. “Licensed” by SBA to deliver the 504 product.
Partnership loan – always involves a CDC, a lender, and a
business.
Niche product – capital equipment and owner-occupied real
estate only. No working capital.
SBA relationship with the CDC, not the lender - no
paperwork/on-going SBA monitoring for the lender.
Primarily used by existing businesses.
1.
2.
3.
Traditional 504 Loan - provides monies for
expansion/purchases
Partial 504 refinancing product – couples an
expansion with a refinancing of existing
debt
Total 504 refinancing product – temporary
product – expires 9/30/12. Provides only
refinancing of existing debt. No expansion
money or cash out available.
Expansions
10% down payment most attractive feature
Permanent financing
Must demonstrate community impact (jobs or
1 of 12 other impacts)
Long term fixed rate for 10 or 20 years
Junior lien position behind participating
lender (~50% LTV for lender)
Uses
Land
New Building
Soft Costs/
Interim interest
$200,000
$750,000
$ 50,000
Total
$1,000,000
Sources
Bank/Lender
CDC 504 Loan
Equity
$500,000 (50%)
$400,000 (40%)
$100,000 (10%)
Total
$1,000,000
SBA project costs can include a refinancing
component not to exceed 50% of the cost of
an expansion
Works very well for borrowers expanding an
existing building with debt
Equity for borrower can be inferred – 100%
financing might be available
Must demonstrate 10% savings to business
Subordinating to existing debt in excess 50%
threshold can be considered outside the SBA
project costs
Uses
New Construction Costs
Debt refinance (50% of new costs)
$ 900,000
$ 450,000
Total SBA project costs:
Debt in excess of 50%
$1,350,00
$ 50,000
Sources
Bank/Lender
CDC 504 Loan
Equity
Total:
$ 725,000 (50% of new + debt in
excess of 50%)
$ 540,000 (40% of new)
$ 135,000 (10% of new)
$1,400,000 (SBA project + debt in
excess of 50%)
Not the traditional 50%/40%/10% structure
Project structure governed by recent appraisal
Lender always does 50% of appraised value
Step One: Determine Value by New Appraisal
Step Two: Structure:
Lender funds 50% of appraisal
Borrower injects all equity (appraisal less debt)
CDC does remainder
Appraisal of building
Debt on Building
$1,000,000
$ 800,000
Bank (always 50%)
Borrower (appraisal less debt)
CDC 504
$ 500,000
$ 200,000
$ 300,000
Too much equity – not eligible or feasible for 504
refinance product
Too little equity or upside down – borrower has
to inject cash or pledge other collateral
Documentation challenging - must submit entire
genealogy of the loan (since origination) – not
bad if originated at same bank that is refinancing
Temporary Product – expires 9/30/12
Rate on refinancing product ~ 30 basis points
higher than traditional product – SBA expects
higher default of this tranche of SBA loans
Borrower historically must been current on debt
service payments
Partial Refinancing (permanent) and Total
Refinancing (expires 9/30/12)
All electronic processing - doesn’t directly affect
the lenders or borrowers, but it does reduce
costs of product (shipping & handling) and
expedites processes
Expanded the definition of small businesses $15MM NW & $5MM PAT
Maximum loan increased from $2MM to $5MM
Waived most SBA fees for parts of 2009 & 2010
David C. Long
1-877-504-SPOT
david@hbcloans.com
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