The SBA 504
Loan Program
www.seedcorp.com
Revised by SEED Corp. 5/13
What is the SBA 504 Loan Program?
 It is the Small Business Administration’s
“economic development financing program.”
 Loans are provided to expanding, small
businesses to aid in job creation.
 SBA loans are guaranteed by the Federal
Government.
2
Goal of Presentation
General understanding of the
SBA 504 Loan Program from
origination to servicing, and
504 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 (CDC’s) 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
 Bank’s 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 bank’s 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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What’s 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 borrower’s existing debt.
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What’s 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 (508) 822-1020
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
Bank 50%
SBA 504 Loan 40%
Owner’s Equity –
10%
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Typical Structure for a Special
Purpose Building OR Start-Up
Bank 50%
SBA 504 Loan 35%
Owner’s Equity –
15%
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Typical Structure for Start-Up Business
AND Special Purpose Building
Bank 50%
SBA 504 Loan 30%
Owner’s Equity –
20%
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Structure of a Typical $1 Million Project
Entity
Loan
Amount
% of
Project
Lender
$500,000
50%
1st Mortgage
SEED/SBA 504
$400,000 *
40%
2nd Mortgage
Borrower
$100,000
10%**
TOTAL:
$1,000,000
Security
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 building
will require additional 5-10% from the borrower.
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Eligible Project Costs:
Land
Construction
Contingency(10%)
Site Preparation
Machinery/Equipment
Furniture/Fixtures
$ 200,000
600,000
60,000
10,000
50,000
20,000
Soft Costs ~
Permits
Architect/Engineer
Appraisal
Environmental Report
Title Insurance
Interim Interest & Fee
TOTAL
2,500
25,000
4,000
2,500
1,000
25,000
50% Bank
40% CDC
10% Owner
100%
$500,000
$400,000
$100,000
$1,000,000
Any costs incurred within 9 months*
prior to submission to SBA
are eligible toward total project costs
$1,000,000
* 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 504
debenture – 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 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.
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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 report’s 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 SEED’s 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 bank’s 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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Bank’s 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 bank’s 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 bank’s 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 CDC’s 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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What’s 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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What’s 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
CDC Servicing Fee (SEED .875 + SBA .125) 
SBA Fee
Total Fees
SEED’s Effective Rate (As of 4/13)
0.100%
1.000%
0.937%
2.037%
4.155%
 SBA Required Servicing Fee - This fee can go up to
1.5%. CDC’s Servicing Fees vary and impact the client’s
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.
 Borrower’s 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 Borrower’s 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
Based on April 2013 Funding
Year
1
2
3
4
5
6
7
8
9
10
After 10
%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
% of Principal Outstanding
102.12%
101.91%
101.69%
101.48%
101.27%
101.06%
100.85%
100.64%
100.42%
100.21%
100.00%
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
Improvements
Soft Costs
Bank (50%)
SBA 504 (40%)
Client (10%)


$925,000
148,000
27,000
$1,100,000
$550,000
$440,000
$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
Bank (50%)
SBA 504 (35%)
Client (15%)
$1,200,000
600,000
420,000
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
Bank (50%)
SBA 504 (35%)
Client (15%)
$675,000
337,500
236,250
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
Building Construction
FF & E
Professional Fees
Contingencies/Interim Interest
Bank (50%)
SBA 504 (30%)
Client (20%)


$1,500,000
5,000,000
950,000
70,000
380,000
$7,900,000
3,950,000
2,370,000
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 (508) 822-1020
or Visit www.seedcorp.com
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