Lender SummitAugust 19, 2011

The Small Business Administration (SBA) 504 Loan

Major differentiations between 7a and 504 loans:

Delivered by certified development companies (CDC). All shapes and sizes of CDC’s. “Licensed” by SBA to deliver the 504 product.

Partnership loan – always involves a CDC, a lender, and a business.

Niche product – capital equipment and owner-occupied real estate only. No working capital.

SBA relationship with the CDC, not the lender - no paperwork/on-going SBA monitoring for the lender.

Primarily used by existing businesses.

SBA’s “Other” Loan – The 504 Loan

1. Traditional 504 Loan - provides monies for expansion/purchases

2. Partial 504 refinancing product – couples an expansion with a refinancing of existing debt

3. Total 504 refinancing product – temporary product – expires 9/30/12. Provides only refinancing of existing debt. No expansion money or cash out available.

Three Hybrid 504 products

Expansions 10% down payment most attractive feature Permanent financing Must demonstrate community impact (jobs

or 1 of 12 other impacts) Long term fixed rate for 10 or 20 years Junior lien position behind participating

lender (~50% LTV for lender)

Traditional 504 loan

UsesLand $200,000New Building $750,000Soft Costs/Interim interest $ 50,000 Total $1,000,000 SourcesBank/Lender $500,000 (50%)CDC 504 Loan $400,000 (40%)Equity $100,000 (10%) Total $1,000,000

Sample Structure:Traditional 504 Loan

SBA project costs can include a refinancing component not to exceed 50% of the cost of an expansion

Works very well for borrowers expanding an existing building with debt

Equity for borrower can be inferred – 100% financing might be available

Must demonstrate 10% savings to business Subordinating to existing debt in excess 50%

threshold can be considered outside the SBA project costs

Partial Refinance 504 Product

UsesNew Construction Costs $ 900,000Debt refinance (50% of new costs) $ 450,000 Total SBA project costs: $1,350,00Debt in excess of 50% $ 50,000 SourcesBank/Lender $ 725,000 (50% of new + debt in

excess of 50%)CDC 504 Loan $ 540,000 (40% of new)Equity $ 135,000 (10% of new) Total: $1,400,000 (SBA project + debt in

excess of 50%)

Sample Structure:Partial Refinance

Not the traditional 50%/40%/10% structure Project structure governed by recent

appraisal Lender always does 50% of appraised value Step One: Determine Value by New AppraisalStep Two: Structure: 

Lender funds 50% of appraisal Borrower injects all equity (appraisal less debt) CDC does remainder

Total Refinancing Product

Appraisal of building $1,000,000Debt on Building $ 800,000 Bank (always 50%) $ 500,000Borrower (appraisal less debt) $ 200,000CDC 504 $ 300,000

Sample Structure:Total Refinancing

Too much equity – not eligible or feasible for 504 refinance product

Too little equity or upside down – borrower has to inject cash or pledge other collateral

Documentation challenging - must submit entire genealogy of the loan (since origination) – not bad if originated at same bank that is refinancing

Temporary Product – expires 9/30/12 Rate on refinancing product ~ 30 basis points higher

than traditional product – SBA expects higher default of this tranche of SBA loans

Borrower historically must been current on debt service payments

Key Issues:

Partial Refinancing (permanent) and Total Refinancing (expires 9/30/12)

All electronic processing - doesn’t directly affect the lenders or borrowers, but it does reduce costs of product (shipping & handling) and expedites processes

Expanded the definition of small businesses - $15MM NW & $5MM PAT

Maximum loan increased from $2MM to $5MM Waived most SBA fees for parts of 2009 & 2010

Major Changes in the 504 Product Last 24 months:

David C. Long1-877-504-SPOTdavid@hbcloans.com

Q & A: