The SBA 504
Loan Program
www.seedcorp.com
Revised by SEED Corp. 4/14
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.
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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 3/14 is 5.3% on a
20-yr debenture, and 4% 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; including an
existing SBA 504 loan
 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:


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

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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
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Typical Structure for a Special
Purpose Building OR Start-Up
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Typical Structure for Start-Up Business
AND Special Purpose Building
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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
50% Bank
40% CDC
10% Owner
100%
$500,000
$400,000
$100,000
$1,000,000
2,500
25,000
4,000
2,500
1,000
25,000
$1,000,000
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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)
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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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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 loans over $1,000,000, the
appraiser must be state certified.
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Appraisals (Cont.)
 New construction or substantial renovations must
estimate “as complete” value and a recertification
must be done 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
(land, building, equipment and business). When
collateral is special purpose, the appraiser must be
experienced in the particular industry
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Appraisals (Cont.)
An appraisal must be submitted with application if
relying on owner’s equity for injection.
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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.

The SBA charges a one-time bank participation
fee of 0.5% on the bank’s first mortgage.
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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?
 Eliminating the personal resource test;
on April 21, 2014;
 Eliminating the nine-month rule for the 504 loan
program; on April 21, 2014;
 The industry agency, National Association of
Development Companies (NADCO) is working
to “rebrand” the 504 Program to REAL 504
(Real Estate Advantage Loans).
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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 3/14 Sale):
3.263%
Plus Fees:
Annual Central Servicing Agent Fee
CDC Servicing Fee (SEED .875 + SBA .125) 
SBA Fee
Total Fees
SEED’s Effective Rate (As of 3/14)
0.100%
1.000%
0.937%
2.037%
5.300%
 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 March 2014 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
103.26%
102.94%
102.61%
102.28%
101.96%
101.63%
101.31%
100.98%
100.65%
100.33%
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.
 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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