This presentation is a complete overview of SBA eligibility rules and the SBA 504 approval process. The content is an excellent introduction for those new to SBA lending as well as a good refresher course for those lenders who have been involved in SBA 504 lending.

1. SBA 504 LENDER WORKSHOP…
PART I:
OBTAINING
SBA LOAN APPROVAL

2. About Us

3. Our Goals for This Session
 Understanding what it takes to
obtain an SBA 504 approval
 How to make the process as fast
and efficient as possible

4. Section 504 CDC Loan Program
 Key Players:
 US Small Business Administration
 Certified Development Companies
 Third-Party Lenders
 Small Business Applicant

5. Section 504 CDC Loan Program
 Began October 1980
 Section 504 added to the Small Business
Investment Act in 1986
 Provides access to fixed rate, long-term
funding in the public capital markets not
otherwise available to small business
 29 years of history have led to more than
$63 billion in 504 loans

6. What is 504?
Purpose:
To foster economic development,
create or preserve job opportunities
and stimulate growth, expansion and
modernization of small businesses

7. What is 504?
Definition: The 504 Loan Program is economic
development financing specifically designed to
stimulate private sector investment in long-term
fixed assets to increase productivity, create new
jobs, and increase the local tax base; the stimulus
is provided by making long-term, low down
payment, reasonably priced fixed-rate financing to
healthy and expanding businesses which have the
highest probability of successfully creating new
jobs and competing in the world marketplace.

8. Economic Development
 Job Goals
 Community Development Goals
 Public Policy Goals

9. Job Goals
 One new full-time job created per $65,000 of
the SBA loan
 Job retention can be used if reasonably
show job cost to community
 $75,000 in special geographic area
 $100,000 if a small manufacturer
 Borrower has two years to meet job creation
goal

10. Community Development Goals
 Improving, diversifying or stabilizing the
economy of the locality
 Stimulating other business development
 Bringing new income to the community
 Assisting manufacturing firms
 Assisting businesses in Labor Surplus Areas

11. Public Policy Goals
 Revitalizing a business district
 Expanding exports
 Expanding Minority Enterprise Development
 Aiding rural development
 Enhancing economic competition
 Restructuring because of federally-mandated
standards or policies

12. Public Policy Goals
 Assisting businesses in or moving to areas
affected by Federal budget reductions
 Veteran-owned businesses
 Women-owned businesses
 The project is energy-saving
 Reduction of rates of unemployment in labor
surplus areas

13. Project Costs – What’s Eligible?
 Five Components to eligible project
costs:
 Cost of acquiring a fixed asset
 Cost of building and building improvements
 Professional fees
 Other expenses
 Permissible debt refinance

14. Ineligible Project Costs
 The borrower can and will incur ineligible project
costs in connection with the project such as:
 Third-Party Loan fees
 Attorney’s fees incurred in closing the loans
 Franchise fees
 Brokers fees
 Cost of interior finishing space to be leased to a
third party
 These cannot be part of the project or paid by the
504 loan

15. An Eligible Borrower Must:
 Be an operating business
 Be organized for profit
 Use and/or occupy the project property
 Be a small business under size requirements
 In CDC’s geographic jurisdiction
 Project must have a “sound business purpose”
 Demonstrate a need for desired credit
*Eligibility determined at time of application

16. Ineligible Types of Businesses
 The SBA lists 20 types of businesses as
ineligible for 504 loans. The most common are:
 Non-Profits
 Passive Businesses
 Businesses with an associate of poor character
 Prior government default
 Non-US Citizen

17. Size Standards - 504
 Less than $15 million tangible net worth
 Less than $5 million average net income
after taxes for previous two years
 7(a) size standards can also be used
-25% higher allowed if project in a Labor Surplus Area
-Size determined as of date of the loan application
-Size determination is for applicant and all affiliates

18. Size Standards – 7(a)

19. Size Standards - Affiliations
 Concerns and entities are affiliates
of each, when one controls or has
the power to control the other, or a
third party/parties controls or has the
power to control both

20. Size Standards - Affiliations
 Affiliation can arise through:
 Stock ownership
 Agreements to merge
 Common management
 Identity of interest
 Newly organized concern rule
 Joint ventures
 Franchise or License Agreements

21. Franchise & License Agreements

22. Franchise & License Agreements
 Review of Franchise Agreements to
determine if there is affiliation is complex
 To speed up the approval process, a third
party, Frandata, has developed the
franchise registry, where franchisors can
be “pre-approved” for eligibility review
 Franchise/License agreements must be
cleared by SBA prior to application
submission

23. Franchise & License Agreements

24. SBA 504 Loan Structure

25. Financing Structure
 Single Purpose or Start-Up:
50/35/15
 Single Purpose & Start-Up:
50/30/20
 Permanent/Interim Loan
 Borrower Equity

26. EPCs & Operating Companies
 General Rule: SBA business loans are only
made to operating businesses that own and
use the business property
 The only exception is for an SBA business loan
to allow an Eligible Passive Concern (EPC),
which in turn acquires the project property that
is leased to the Operating Company (OC)
 The ultimate beneficiary of the SBA loan is the
operating small business

27. EPCs & Operating Companies
 The structure can be EPC/Borrower and OC
Guarantor or EPC Borrower and OC Co-
Borrower
 Loan must be structured as Co-Borrower
when any other assets acquired with the
504 loan are owned by the OC
 There can be multiple OCs in a 504 project,
but only one EPC

28. EPCs & Operating Companies
 There must be a lease between
EPC and OC that requires:
 Term must be at least equal to loan
term
 Rent paid must be same as loan
payments
 Lease must be for entire property

29. EPCs & Operating Companies
 Occupancy
 51% - 49% Existing facilities
 60% - 40% New construction
 For new construction, 20% can be leased
long term and 20% temporarily. OC must
begin to expand into the 20% temporary
space within three years and occupy 80% of
the building within 10 years

30. Guarantors
 If EPC/OC Structure, the OC must guarantee
 Each stockholder owning 20% or more must guarantee
the loan
 Each spouse owning 5% or more must guarantee the
loan when combined ownership interest of both
spouses is 20% or more
 6-Month Rule Applies
 Any person subject to the personal guarantee requirements 6 months
prior to the date of the loan application would continue to be subject
to the requirements even if that person has changed his or her
ownership interest to less than 20%. The exception to this rule would
be a 100% relinquishing of ownership.

31. Loan Terms
 SBA
 20-year or 10-year term
 Third-Party Lender
 If SBA is 20-year, must be at least 10-year
term
 If SBA is 10-year, must be at least 7-year
term

32. 504 Loan Amounts
 Minimum amount for a 504
debenture is $25,000
 Maximum amount is $5,000,000
or $5,500,000 for energy
reduction/production projects as
well as manufacturing firms

33. Application
1. Credit
2. Guarantors
3. Eligibility
4. Project Costs
5. Collateral
6. Other

34. Application

35. Application - Credit
 Three Years’ Business FTR
 IRS Form 4506-T
 Interim Financials
 Income Statement
 Balance Sheet
 Aging A/R & A/P

36. Application – Credit
 Debt Schedule
 Credit Reports
 New Business
 12-Month Cash Flow
 Two Years’ Projected Income
Statement

37. Application - Guarantors
 One-Year Personal FTR
 IRS Form 4506-T
 Personal Financial Statement
 SBA Form 413
 Credit Reports

38. SBA Form 413

39. Application – Eligibility
 SBA Form 912 on each:
 Officer & Director (regardless of ownership)
 Proprietor, Partner & Stockholder with 20%
or more ownership in Operating Company
 Owner with 20% or more ownership in EPC

40. SBA Form 912

41. Application – Eligibility
 CAIVRS
 Applicant, Guarantors, & Affiliates
 Affiliate Information
 Ownership or Management Control
 Last Two Years’ FTRs
 Statement why it is not affiliated

42. Application – Eligibility
 Franchise Approval
 Pre-Application
 Includes Affiliated Franchises
 Alien Clearance – USCIS
 Historic Approval – if applicable

43. Application – Project Costs
 Signed Valid Purchase Contract
 Contractor Estimates
 Professional Fees

44. Application – Collateral
 Appraisal
 Name SBA as Intended User
 Two of Three Methods Utilized
 Value must be at least 90% of Total
Project Cost, except in the case of a
change of ownership

45. Application - Collateral
 Environmental
 Questionnaire and RSRA
 Phase I
 Phase II
 Gas Stations
 Taking Other Collateral

46. Application – Other Items
 Bank Commitment Letter
 Requires SBA Language with separate
refinance language, if applicable
 Organizational Documents and
FEINs – OC and EPC
 Refinance Documents
 HCDC Forms

47. 504 Loan Fees
$1,000,000 Project
$500,000 Third-Party Lender
$400,000 SBA Net Debenture
$100,000 Equity
$1,000,000

48. 504 Loan Fees
$400,000 Net Debenture
$0 SBA Guarantee Fee
$1,000 Fiscal Agent Fee
$6,000 HCDC Processing Fee
$1,668 Underwriter Fee
$5,640 HCDC Closing Costs
$414,308
$692 Balance to Borrower
$415,000 Gross Debenture

49. 504 Loan Fees
 Third-Party Lender charges its own
fees & closing costs, including a
one-time SBA Participation Fee of
0.5% of the TPL loan amount
 $2,500 in this example
 Only paid if TPL is Senior Lien
Holder

50. Submission & Timing
 HCDC Loan Committee
 OH & IN – First and third Thursday of
each month
 KY – second Thursday each month

51. Submission & Timing
 SBA Approval Process
 Credit (Loan Authorization)
 Appraisal
 Environmental

52. For More Information…
Andy Young
Vice President & Senior Loan Officer
ayoung@hcdc.com
513.458.2232
Angie Howard
Loan Officer
ahoward@hcdc.com
513.458.2215
Mike Crowe
Loan Officer
mcrowe@hcdc.com
513.458.2233 @theHCDC