1. SERVICE EXPERTISE EXPERIENCE DEPENDABILITY
The SBA 504
Loan Program
SERVICE EXPERTISE EXPERIENCE DEPENDABILITY

2. The 25 Year 504 Debenture Is Here!!
As of 4/2/18

3. SEED’s Loan Programs
Currently, SEED administers three loan programs:
SBA 504 Loan Program – Loans up to $5.5 million for real estate and heavy machinery and equipment.
Small Loan Program – Loans up to $250,000, usually as part of a larger project, with flexible use of funds.
Micro Loan Program – Loans up to $50,000, flexible use of funds.

4. Where is SEED’s 504 Geographic Coverage ?
SBA 504 Program: All of Massachusetts and Rhode Island (except Washington County)

5. What is the SBA 504 Loan Program?
It is the Small Business Administration’s (“SBA”) “economic development financing program.”
Loans are provided to expanding small businesses to aid in job creation.
SBA loans are guaranteed by the Federal Government.

6. Goal of the Presentation
General understanding of the SBA 504 Loan Program – from origination to closing!
Learn about the 504 Program features and benefits.
For even more detail, including forms, regulations and the Standard Operating Procedure (SOP) ~ Current version is (J) Manuals ~ visit

7. The Role of SEED Corporation
The SBA 504 Program is administered through SBA Certified Development Companies (CDC’s) ~ like SEED Corporation that was formed in when the program first began;
SEED underwrites, packages, closes and services SBA 504 loans on behalf of the U.S. Small Business Administration.

8. 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 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?

9. Benefits to the Borrower:
SBA 504 Loan Program
Benefits to the Borrower:
Financing for a fixed asset project with as little as a 10% injection;
Long-term, fixed rate funds…enhancing cash flow for business;
SEED’s interest rate as of March 2018 is:
% on a 20-year debenture
% on a 10-year debenture
What will the 25-year debenture be??

10. Benefits to the Borrower (cont.):
SBA 504 Loan Program
Benefits to the Borrower (cont.):
Ability to include soft costs, equipment and furniture and fixtures in a real estate project … enabling businesses to minimize out of pocket expenses and preserve cash;
Lower down payment conserves working capital.

11. SBA 504 Loan Program Benefits to the Bank:
Bank’s maximum loan-to-value is typically 50%, minimizing risk and improving liquidity;
Ability to provide 90% financing to a small business client;
Program allows reliance on financial projections – for startups and businesses with inadequate historic cash flow;

12. SBA 504 Loan Program Benefits to the Bank (cont.):
The bank’s first mortgage can be sold in the secondary market for a premium.
The CDC is responsible for all of the paperwork!!

13. What is needed for SEED to approve a 504 request?
Purchase & Sales Agreement for project property, cost estimates for any construction or renovation projects and equipment estimates, if applicable;
Three years of tax returns on the business and interim financial statements if beyond 120 days of the company’s FYE;
Information on the borrower’s existing debt.

14. What is needed for SEED to approve a 504 request?
Current personal financial statement and two 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!

15. Use of Funds Fixed-Asset Acquisition or Expansion:
Purchase land and construct new buildings;
Purchase and/or renovate existing buildings;
Construct an addition to an existing building;
Construct or remodel buildings on leased land;
Acquire / install machinery and equipment;

16. Use of Funds (cont.)
Soft costs related to the project (appraisal, environmental assessment, interim interest, and professional fees);
Refinance existing eligible fixed asset debt up to 50% of new expansion project;
Direct Debt Refinance since up to 90% LTV; excluding any government financing (SBA 504, 7a, USDA);

17. Contact SEED (508) 822-1020 for Loan Structure!
Use of Funds (cont.)
Ineligible use of funds:
Rolling stock - trucks, autos and airplanes;
Working capital;
Franchise fees;
Management fees and advertising;
Incorporation / organization costs;
Contact SEED (508) for Loan Structure!

18. Project Size Requirements
Minimum Amount of 504 Loan:
$25,000 – SEED calculates costs and benefits for 504 projects under $300,000 and may use other loan funds
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
*There is no maximum limit to project size

19. Project Size Requirements
New:
Renewable energy and 10% savings projects –
May obtain up to $5.5 million per project, but
May NOT exceed $16.5 million in aggregate.
The $16.5 million aggregate is not reduced or
impacted by other SBA financing (such as 7a,
Community Advantage or Regular 504 loans).

20. Job Requirements
Borrowers must create one (1) job for every $65,000 funded (SBA Portion)
Exceptions:
Manufacturing businesses provides one (1) job for every $100,000 funded (SBA Portion);
Projects that meet any of the SBA Public Policy Goals or Community Development Goals.

21. Public Policy Goals
Not required to create one (1) 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;

22. Public Policy Goals (Cont.)
Not required to create one (1) job for each $65,000
Aiding rural development (per USDA Eligibility);
Energy-consumption reduction of at least 10% or sustainable design or equipment and process upgrades;
Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports);

23. Public Policy Goals (Cont.)
Not required to create one (1) job for each $65,000
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);

24. Community Development Goals
Not required to create one (1) 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;

25. Not Eligible for 504 Funding
Non-Profits (for profit affiliates are eligible);
Lending Institutions;
Life Insurance Companies;
Private Clubs;
Speculative Investment;
Non-owner occupied buildings;

26. Not Eligible for 504 Funding (Cont.)
Gambling concerns;
Businesses engaged in promoting religion;
Cooperatives (exception for some produce coops);
Political or lobbying services;
Businesses located in a foreign country or owned by a non-resident alien;
Businesses selling through pyramid plans;

27. Not Eligible for 504 Funding (Cont.)
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.

28. Structure of a Typical $1 Million Project
Loan % of
Entity Amount Project Security
Lender $500, % 1st Mortgage
SEED/SBA $400,000 % 2nd Mortgage
Borrower $100, %*
TOTAL: $1,000, %
 Total Debenture: $409,000 ($8,600 rounded up)
(Up front fees of 2.15% on $400,000; included in the debenture)
* Projects that involve a new business and/or special purpose building will require
an additional 5-10% from the borrower.

29. Typical Structure for Established Business

30. Typical Structure for Special Purpose Building OR Start-Up

31. Typical Structure for Start-Up Business AND Special Purpose Building*
*And now for second time “special purpose” projects

32. Eligible Project Costs
Land $ 200,000
Construction ,000
Contingency (10%) ,000
Site Preparation ,000
Machinery/Equipment ,000
Furniture/Fixtures ,000
Soft Costs ~
Permits ,500
Architect/Engineer ,000
Appraisal ,000
Environmental Report ,500
Title Insurance ,000
Interim Interest & Fee ,000
TOTAL $1,000,000
50% Bank $500,000
40% CDC $400,000
10% Owner $100,000
100% $1,000,000

33. Fees Charged by the CDC
Financed as part of 504 loan – 2.15% of net debenture
CDC Processing Fee: %
SBA Guarantee Fee: % Paid to SBA- one time fee 
Underwriting Fee: %
Covers expense of pooling & underwriting 504 debenture,
paid directly to Merrill Lynch
Funding Fee: %
Paid to Central Servicing Agent (Price Waterhouse)
Total: 2.15%
 Effective 10/1/15, the SBA Guarantee fee has gone to zero from 0.50%!

34. Other Requirements Occupancy: Jobs:
Business must occupy at least 51%;
Business must initially occupy at least 60% of a newly constructed building, “some additional space” within three years and 80% within 10 years.
Jobs:
Create/Retain one job for each $65,000 borrowed through the 504 Program unless the project meets a Public Policy Goal
Manufacturing Businesses- one job per $100,000. ;

35. Ownership of Building By the Operating Company (OC);
By an Eligible Passive Company (EPC)
Individuals
New Corporation
Partnership
Limited Liability Company
Trust

36. Guarantees
Required for any principal with 20% ownership or more in Operating Company (OC) or Eligible Passive Company (EPC). (NEW: If any combined spousal ownership – no matter how minimal - totals 20%, both must guaranty.)
SBA also stressed in recent SOP that appropriate guarantees can be required regardless of ownership (think key employee or day-to-day manager due to hands-off owner management)

37. 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 years);
~OR~
Use 7A standards as an alternative.
*Size standards are increased by 25% in labor surplus areas

38. What’s An Affiliate? Affiliation based on ownership
Ownership or power to control more than 50% of the concern’s voting equity;
If no majority interest – “SBA will deem the BOD, President or CEO (or other officers, managing members or partners) to be in control”;
Also minority owners if they hold the right through negative control within the charter or by-laws.
Changes effective 7/27/16

39. What’s An Affiliate? Major Change: Franchise/License Agreements:
SBA does not find the mere existence of a franchise or license creates affiliation ~ so as long as they:
Have a right to profit from its efforts; and
Bears the risk of loss commensurate with ownership.
Changes effective 7/27/16

40. Appraisals
SBA requires a real estate appraisal if the estimated value of the project is greater than $250,000;
All appraisals must be co-addressed to the Bank and U.S. SBA and be consistent with Uniform Standards of Professional Appraisal Practice (USPAP);
Appraisals must reflect a minimum of two methods of valuation (sales, income and/or cost);
For loans >$1MM – must be performed by a state certified or state licensed appraiser;

41. Appraisals (Cont.)
For new construction or substantial renovations, appraiser must estimate “as complete” value and recertify 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
--When collateral is special purpose, the appraiser must be experienced in the particular industry;

42. Appraisals (Cont.)
An appraisal must be submitted with an application if relying on owner’s equity for injection or if a change of ownership between partners is part of your project.

43. 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 and Records Search with Risk Assessment (RSRA) is necessary

44. Environmental Reports (Cont.)
Environmental Questionnaire and Records Search with Risk Assessment:
Unlikely there is environmental contamination;
Risk Assessment states “Low Risk”;
If “Elevated Risk” or “High Risk” – Phase I required;

45. Environmental Reports (Cont.)
Transactional Screening Analysis (TSA) Required:
Environmental Professional must conclude that no further investigation is warranted (reliance letter required);
If opinion warrants further investigation, a Phase I must be obtained. SBA now allows Phase I’s to be up to one year old (vs ASTM rule of 180 days).

46. 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” CDC must proceed as recommended by the Environmental Professional; SBA will require compliance with all recommendations;
Phase II ESA or Supplemental Reports Required.

47. 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 the project;
CDC will determine whether disbursement is appropriate according to subparagraph G, Pages of SBA SOP (J).

48. 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 );
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.

49. 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.

50. The 504 “Process”
Potential application processing delays: Franchise reviews; 912 criminal clearances; INS (Immigration) confirmations and gasoline jobber agreement reviews;
Bank closes on permanent loan and bridge loan;
SEED/SBA payoff the bank’s bridge loan in days on turnkey projects or after the project is completed (construction & renovation projects);
SBA Authorization (commitment) is valid for four years (48 months).

51. Bank’s First Mortgage * Ask us about our first-time lender incentive!
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;
Bank can charge points;
One-time fee of 0.50% on the bank’s first mortgage is
charged by the SBA. *
* Ask us about our first-time lender incentive!

52. 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 disbursement and supervises construction.

53. Legal Fees
Closing costs are financed into the gross debenture and 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

54. Rate the borrower actually pays
Effective Rate
Rate the borrower actually pays
Note rate (as of 03/18 Sale – 20 yrs) %
Plus Fees:
Annual Central Servicing Agent Fee %
CDC Servicing Fee (SEED SBA .125)  1.000%
SBA Fee %
Total Fees %
SEED’s Interest Rate (As of 03/18) %
 SBA Required Servicing Fee – This fee can go up to 1.5%. CDC’s Servicing Fees vary and impact the client’s effective rate!

55. Debenture Rate
Negotiated by Underwriters, DCFC and the U.S. Government
Based on current market conditions at the time the debenture is sold;
Paid to bond investors on semi-annual basis.

56. 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.

57. Funding the 504 Loan When SBA Authorization is received:
CDC reviews for changes and/or errors;
Copies sent to Borrower and Bank with instructions;
Bank orders Appraisal and Environmental Review (if not already completed);
CDC orders Preliminary Title and UCC searches (if needed);
Work begins on obtaining required documents – corporate resolutions, certificates of good standing, etc.

58. 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.

59. 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 and due date of first payment;
One week later, final closing letter sent to borrower with amortization schedule and debenture note;
Please Note: It can take up to three months to fund the 504 Debenture once project is completed

60. Events that Can Impact 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.

61. First Half of 20-Year Debenture But what about the Assumption Feature?
Prepayment
First Half of 20-Year Debenture
Prepayment Estimate
*Based on current note rate of %
Year %*
Loan Amt.**
Prepayment Penalty 1
3.253%
$ ,000
$ ,306 2
2.928%
$ ,236
$ ,543 3
2.603%
$ ,230
$ ,454 4
2.277%
$ ,957
$ ,901 5
1.952%
$ ,146
$ ,444 6
1.627%
$ ,780
$ ,088 7
1.301%
$ ,842
$ ,837 8
0.976%
$ ,312
$ ,697 9
0.651%
$ ,171
$ ,673 10
0.325%
$ ,398 $
After 10
0.000%
$ ,973 $
Prepayment is based on the negotiated rate plus principal in year one and 10% less each year after.
**Loan amount is an estimate based on 20 year amortization at a 20 year debenture rate of 5%
But what about the Assumption Feature?
Can the pre-pay go away??

62. SBA Debt Refinance Program (Returned 6/24/2016)
Eligible Debt
Secured by fixed assets and be in place at least two years;
Borrower must have been in business two years and 85% of the loan must have been for Real Estate or Equipment;
Any debt being refinanced must have been current for the last 12 months.

63. SBA Debt Refinance Program (Returned 6/24/2016)
Eligible Costs
Owner-occupied commercial real estate or equipment (not Federal debt);
Closing Expenses;
Eligible business expenses that do NOT exceed % of the value of the assets, including utility bills, rent, salaries, inventory, etc.

64. SBA Debt Refinance Program (Continued)
Loan-to-Value (LTV)
LTV of 90% for commercial mortgage (additional collateral may be pledged to achieve 90%);
LTV of 85% when eligible business expenses are included (eligible business expenses are limited to 20% of the value of the fixed asset; additional assets CANNOT be used to increase the amount of the “cash out”).

65. SBA Debt Refinance Program (Continued)
--Loan-to-Value (LTV)
Fees/Costs
All regular 504 costs apply and are financed in the 504 loan;
Third Party Lender fee of 0.5% still applies;
The ongoing fee is slightly higher (0.682% vs %) which has a minor (0.04%) impact on the effective rate ~ most recently 5.04% vs 5%

66. *25* What’s New in *25*
25 Year 504 maturity product was made available this week (April 2, 2018)!!
Accompanying bank participation must be at least 10 years.
Loans approved prior to 4/2/18 may not be extended to the longer term.
Auctions expected to be monthly, but will depend on demand.
Stay tuned for more info as it becomes available!

67. What’s New in 2018
Borrower’s Contribution – extra 5% on second and future special purpose projects – so 20%.
Expanded Credit Elsewhere Test (specific focus on liquidity – currently 10% or more owners).
Occupancy by entities conducting illegal activities per Federal standards (particularly marijuana facilities/tenants) is prohibited.
DIY Construction definition has expanded to include carpet installation and painting.

68. What’s New in 2018 CHANGE OF OWNERSHIP - Stock sale of com’l RE:
Real estate must have been owned a minimum of three years;
Ownership must transfer 100% of both RE and business buyout between existing partners only (no new parties);
Seller cannot remain as an officer, director or key employee of the business.

69. Franchise Updates There is a “NEW” SBA Franchise Directory!
If applicant is on the Directory  “pass GO!”
See the chart on the following slide for steps to be taken – process has been made simpler.
When franchisor has multiple agreements, SBA will only require review of Small Business Applicant!

71. 912 – Personal History Statement
The character evaluation begins with 1244 form now – if questions 1-3 are no, a 912 is not needed.
If yes to either 2 or 3, obtain a 912 form and detailed explanation (date of offense, where, specific charge and level – misdemeanor or felony – and disposition of charge – and any fines and whether they are paid or unpaid) for CDC to determine next steps.

72. 912 – Personal History Statement
If sentencing and other conditions of the court have not be met, the Applicant is NOT eligible.
If all conditions are met and the misdemeanor incidents (singular or several) are more than 6 months prior – CDC retains 912 package and processes normally.
If a misdemeanor within 6 months, a felony or a crime against a minor is evident, a background investigation is necessary with submission to SBA.

73. 912 – Personal History Statement
If a background check is required – send a full package to SBA including a Fingerprint Card (FD 258 or Electronic).
The CDC will not receive loan approval until formal clearance by SBA is received in writing.

74. Project Profile: 10% Down Payment (Standard)
Personnel Company – Acquisition of Existing Building
Purchase of Land & Building $925,000
Improvements ,000
Soft Costs ,000
$1,100,000
Bank (50%) $550,000
SBA 504 (40%) $440,000
Client (10%) $110,000
Client has been in business over two years, and is purchasing a ,000 sq ft multi-purpose building for expansion (will lease 40%).
Collateral Coverage is based on 90% Loan to Value.

75. Project Profile: 15% Down Payment (New Owner)
Purchase of Existing Restaurant (New Owner)
Considered new operation:
Building Purchase Price $1,200,000
Bank (50%) ,000
SBA 504 (35%) ,000
Client (15%) ,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.

76. Acquisition of a Special Purpose Bldg – Gas Station
Project Profile: 15% Down Payment (Special Purpose)
Acquisition of a Special Purpose Bldg – Gas Station
Building Purchase Price $675,000
Bank (50%) ,500
SBA 504 (35%) ,250
Client (15%) ,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
Be sure that borrower has never used 504 before – or else 20%.

77. Start-Up Hotel Purchase of Land $1,500,000
Project Profile: 20% Down Payment (Special Purpose & New Owner)
Start-Up Hotel
Purchase of Land $1,500,000
Building Construction ,000,000
FF & E ,000
Professional Fees ,000
Contingencies/Interim Interest 380,000
$7,900,000
Bank (50%) ,950,000
SBA 504 (30%) ,370,000
Client (20%) ,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).

78. Why YOU Should Consider a SEED/SBA 504 Loan
Up to 90% financing for 504 projects;
Lower down payment for client; improved liquidity for bank;
SEED provides quick & efficient turn around (SBA approved for the Abridged Submission Method);
Note is assumable by another borrower;
SEED offers a low 504 rate; provides loans up to $250,000 at 5% fixed to assist with working capital or replace the down payment;
SEED is responsible for all the paperwork; No application form to fill out.

79. South Eastern Economic Development Corporation
Your SEED/SBA Experts
Laurie Driscoll
(508) x 316
Lisa Holmes
(508) x 315
Angela Laperriere
(508) x 312
Liz Voss
(508) x 330
South Eastern Economic Development Corporation
80 Dean Street, Taunton, MA 02780

80. Questions?