1. SBA 504 Loan Program

2. History
What is the SBA?
Small businesses have long been recognized as the backbone of the American economy. They are the movers and shakers in America - the people with the ideas, energy and drive to build and run a business.  Small businesses are also where new jobs are being added to the economy as companies grow and hire more staff. 
To support small businesses and to strengthen the economy, Congress created the U.S. Small Business Administration (SBA) in 1953 to provide a range of services to small businesses, including financing.

3. Objective What is the SBA 504?
SBA 504 is a loan program created in 1980 by SBA to finance the commercial Small real estate and equipment needs of small businesses.
The program offers a competitive long-term, fixed-interest rate.
It’s designed to assist for-profit businesses operating in the US.
The community gets the benefit of additional jobs, business growth, and tax revenues from a growing small business.
The results are a win-win for both the small business owner and the community.

4. 504 Loan Program Typically, a 504 project includes:
A loan secured by a first lien from a private-sector lender that finances at least 50% of an eligible project’s cost.
A secured second lien from a CDC (backed by a 100% guaranteed debenture) that funds up to 40% of the project’s cost.
The small business is required to inject at least 10% of the eligible costs. New and limited purpose businesses may be required to inject additional equity up to a maximum of 20%.
A CDC (Certified Development Company) is an organization designated by the SBA to provide funding for small businesses under the SBA 504 program. There are approximately 270 CDCs nationwide, each covering a specific geographic area. The SBA’s office of Lender oversight oversees each CDCs’ compliance with all applicable rules and regulations. To retain its certification, a CDC must provide at least four 504 loan approvals during two consecutive fiscal years. Under the Preferred Lenders Program, CDCs receive the authority to approve loan for the SBA, thereby expediting loan processing.

5. Typical 504 Structure Borrower 10% Bank Loan 50%
Total Project Cost $1,000,000
504 Debenture Loan
40%
$500,000
Negotiable rate i.e. WSJ Prime + 2% or LIBOR + 5.5%
$400,000
20-yr fixed rate indexed to 10-yr US Treasury yield
$100,000
Borrower’s Equity

6. Project Cost Eligibility
504 Loan Program
Project Cost Eligibility
Eligible uses of funds:
Purchase land & construction of new buildings
Carry out renovation or expansion of existing buildings
Purchase machinery & equipment with a useful life of 10 or more years
Soft costs directly related to the project (appraisal, environmental, interim interest)
Business acquisition
Ineligible uses of funds:
Automotive Purchases
Working Capital
Inventory
Real Estate Investment Properties
Goodwill
Franchise Fees

7. 504 Loan Program Project Eligibility Minimum Owner Occupancy:
Total Project Size:
Existing Building 51%
Min = $200,000
New Construction 60%
Max = $25MM
20% permanently leased
20% to be occupied in 10 years
Borrower Equity Contribution:
Max Debenture Amount:
Typical 10%
$5,000,000 for normal loans
Start-up 15%
$5,500,000 for manufacturers & SBA 504 ‘Green Loans’
Special Use 15%
Both 20%

8. 504 Loan Program Business Eligibility
For-Profit & Privately Held
Small or Medium Sized (as defined by the SBA)
Tangible Net Worth < $15 million
Income After Taxes < $5 million (for the preceding two years)
Creates or Retains Jobs*
Or meets a public policy or community development goal of the SBA i.e. expansion of exports, energy-consumption reduction of at least 10%, etc.
*1 job per $65,000 in Debenture funding – Normal
*1 job per $100,000 in Debenture funding – Small Manufacturers

9. 504 Loan Program Lender 1st Mortgage: SBA 504 Debenture:
Any term is allowed but it should be at least half that of the SBA Loan. Typically it is 10 to 20 years.
Term & maturity 10 or 20 years
20-yr fixed rate indexed to 10-yr US Treasury yield
Interest rate can be variable - adjusted monthly, quarterly, or annually. Indexed to WSJ Prime, Commercial Paper, or LIBOR
One-time third party lender fee paid to the SBA equal to 0.5% of 1st Mortgage.
It can also be Fixed rate for yr. (or full loan term) - indexed to LIBOR, Fed Home Loan Bank, US Treasury, etc.
Typically lenders charge a 1% to 2% origination fee. There may also be an interim loan fee.

10. Debenture Prepayment Penalty
504 Loan Program
Debenture Prepayment Penalty
Year
% (of 1 year’s interest) 1
100 2 90 3 80 4 70 5 60 6 50 7 40 8 30 9 20 10
11+
Prepayment Penalty
SBA 504 Debenture Amount:
Prepayment penalty declines by 10% per annum starting at 100% of one year’s interest based on the remaining principal balance of the debenture amount. See table 
Lender Amount:
Prepayment penalty on lender’s 1st Mortgage is as per the lender’s policies

11. Loan Application Process
The Borrower submits the loan application to the lender
The Lender underwrites the deal and forwards it to the CDC
The CDC underwrites and packages the loan and submits to the SBA
It takes approximately days to receive the loan authorization from the SBA
After receiving authorization, the lender closes the loan and funds to an escrow account

12. Loan Application Process
Borrower submits the loan application with all the relevant documents to the bank or non-bank lender.
The lender reviews and underwrites the project, and then forwards it to the CDC if it approves internally.
Typically, lenders and CDCs perform simultaneous underwriting for the loans they provide, although lenders will contact CDCs after they have conducted their underwriting. In analyzing potential loans, lenders and CDCs look at traditional underwriting criteria, including management and cash flow. Lenders and CDCs may contact each other during the underwriting period to discuss any concerns they may have with projects.
CDC Packages the Loan and forwards it to SBA for issuance of the SBA Authorization (10-14 day turn around)

13. Loan Application Process Continued
After receiving SBA authorization, the lender closes on permanent loan and bridge loan and fund the escrow account.
Although closing documents may be signed for lender loans and CDC loans simultaneously, CDC loans do not get funded until the SBA debentures guaranteeing the loans are sold. Therefore, for example, although the interest rate on a lender loan is set at closing, a borrower does not know the interest rate on the CDC loan until the debenture is sold. Closing documents for CDC loans are signed, leaving space for the interest rates to be added when they are available. CDCs can provide historical rates to borrowers as a guide to what the final rates may be. Because debentures are not commonly sold until 30 to 60 days after closing, projects usually require interim financing from lenders. Traditionally, interim financing is offered by the lender providing the first-lien loan

14. Benefits of an SBA Loan for the Borrower
Financing for a fixed asset project with as little as 10% injection offers an affordable down payment for small business owners.
Lower down payment conserves working capital which plays a key role for successful business operations.
The debenture is a 20-year fully amortized note. This enables the borrower to pay for a facility over the long term and enjoy lower monthly payments.
Fixed rate payments help to improve predictability and reduce volatility of the business cash flows
An opportunity to include soft costs, equipment, and furniture and fixtures in a real estate project enabling businesses to minimize out of pocket expenses and conserve cash.

15. Benefits of an SBA Loan for the Borrower
SBA 504 Loan vs. Conventional Loan – Borrower Contribution
Eligible Project Costs
Land/Building
$500,000
Renovation
$400,000
Equipment
$50,000
Soft Costs
Title Charges
$3,500
Recording Taxes
$15,000
Appraisal
Environmental
$3,000
Architect/Engineer
Bank Points
$10,000
504 Financing Structure
Third Party Lender
$500,000
50%
504 Portion
$400,000
40%
Borrower Contribution
$100,000
10%
Total Sources
$1,000,000
100%
Conventional Financing Structure
20% of Hard Costs
$190,000
Soft Costs
$50,000
Borrower Contribution
$240,000

16. Benefits of SBA Loan for Lender
Retaining the first lien position with little exposure (typically 50%)
Ability to provide 90% financing to a small business client with participation of SBA resulting less risk and more liquidity.
504 allows to finance based on financial projections supported by realistic business plans – for startups and businesses with insufficient historical cash flow.
Onus is less on lenders. The CDC is largely responsible for all of the paperwork and post-closing audit.
Availability of secondary market where the lender can sell the first mortgage and earn the premium. As a result, they can lend more and improve their credit flow.
Can include soft costs, equipment, and furniture and fixtures in overall project.

17. Contact Us 877.850.5130 623.321.6171 avanateam@avanacapital.com
If you’d like to know more about the SBA 504 product, or any other products or services AVANA Capital offers, please contact us and we’ll be happy to assist.
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