The SBA 504
Loan Program
www.seedcorp.com
Revised by SEED Corp. 6/13
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.
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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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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:
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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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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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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 5/13 is 4.14% on a
20-yr debenture, and 3.18% 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 Broker
 Ability to identify financing product that allows
buyer to acquire property with as little as a 10%
injection. This means the ability to MAKE THE
SALE in a greater number of cases!
 Incentive payment for referral to SEED –
As a thank you for the referral of any small
business that funds on an SBA 504 loan for a
commercial property which you represent, SEED
will provide an incentive of .25% of the SBA 504
loan amount up to $1,500.
•
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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.
 SEED is responsible for all of the paperwork!
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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.
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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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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!
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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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Typical Structure for
Established Business
Bank 50%
SBA/SEED
504 Loan - 40%
Owner’s Equity –
10%
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Structure of a Typical $1 Million Project
Entity
Loan
Amount
% of
Project
Lender
$500,000
50%
1st Mortgage
SBA / SEED 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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Fees Charged by SEED
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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Effective Rate
Rate the borrower actually pays
Note rate (as of 5/13 Sale):
2.107%
Plus Fees:
Annual Central Servicing Agent Fee
CDC Servicing Fee (SEED .875 + SBA .125) 
SBA Fee
Total Fees
SEED’s Effective Rate (As of 5/13)
0.100%
1.000%
0.937%
2.037%
4.144%
 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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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% SEED
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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Typical Structure for a Special
Purpose Building OR Start-Up
Bank 50%
SBA / SEED
504 Loan - 35%
Owner’s Equity –
15%
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Typical Structure for Start-Up Business
AND Special Purpose Building
Bank 50%
SBA / SEED
504 Loan - 30%
Owner’s Equity –
20%
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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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Guarantees
 Required for any principal with 20%
ownership or more in Operating
Company (OC) or Eligible Passive
Company (EPC).
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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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Prepayment
First Half of 20 year Debenture
Prepayment Estimate
Based on May 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
102.11%
101.90%
101.69%
101.47%
101.26%
101.05%
100.84%
100.63%
100.42%
100.21%
100.00%
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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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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
Depending on Risk Level of the Property:
Environmental Questionnaire (504 loan $150K
or less and not environmentally sensitive)
Database / Records Search with Opinion
Transaction Screen Analysis (TSA)
Phase I
Phase II (with “no further action” classification)
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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.
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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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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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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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Project Profile: 10% Down Pmt (Standard)
Personnel Company – Acquisition of Existing Building
Purchase of Land & Building
Improvements
Soft Costs
Bank (50%)
SBA/SEED 504 (40%)
Client (10%)
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$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/SEED 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/SEED 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/SEED 504 (30%)
Client (20%)
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$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 SBA/SEED 504 Loan?
 Up to 90% financing for fixed asset project.
 Lower down payment for client (as little as 10%).
 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.
 Broker Incentive Thank You for project referral.
 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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