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Sample Scenario
Let's talk about solutions to financing your client's projects
Structuring Project with Higher Down payment Requirements
- If the building being financed is "special or limited use", or if the business has less
than 2 years operating history, the borrower's equity contribution must be 15%
(20% if both start-up and special use) - The first trust lender must provide a minimum of 50% of the financing
- The 504 portion of the project is reduced by the additional required equity injection
Hotel Acquisition
| Project Costs |
| Acquisition |
$5,200,000 |
| Soft costs |
$100,000 |
| |
$5,300,000 |
|
|
| Sources of Funding |
| Bank |
$2,650,000 |
50% |
| 504 |
$1,590,000 |
30% |
| Equity |
$1,060,000 |
20% |
| $5,300,000 |
100% |
|
| |
|
| |
| Source of Equty |
| Seller Note |
$530,000 |
| Cash |
$530,000 |
| |
$1,060,000 |
|
| Note : Public policy project (rural area) |
How are Leasehold Transactions Structured?
- Lease Term should provide :
- Term of lease must be at least the same as the debenture, twice the term is
preferred
- An assignment of tenant's interest to CDC/SBA
- Ability of CDC/SBA to cure lease defaults
- Additional collateral may be required
Airport Hanger
| 1st Trust |
$400,000 |
50% |
| Across Nations |
$240,000 |
30% |
| Equity |
$160,000 |
20% |
| $800,000 |
100% |
How Large can a 504 Project Be?
- The 504 portion can be smaller than 40%
- The 1st trust lender's portion can exceed 50% of the project
- Thus, the project is not limited by the traditional 50/40/10 split
Office Products Distributor
| Project Costs |
| Land |
$500,000 |
| Construction |
$4,000,000 |
| Soft costs/Equity |
$1,500,000 |
| $6,000,000 |
|
|
| Sources of Funding |
| Bank |
$3,455,000 |
58% |
| Across Nations 504 |
$1,945,000 |
32% |
| Equity |
$600,000 |
10% |
| $6,000,000 |
100% |
|
| Note : Woman owned Business |
How Many are Too Many?
- Borrowers can do multiple 504 loans as long as the total outstanding does not exceed the maximum amount SBA is permitted to loan
» $1,500,000 Normally
» $ 2,000,000 for public policy loans
» $4,000,000 for manufacturers
Day Care Center & Later Expansion
Loan #1 - Construct Facility
| Project Costs |
| Construction |
$862,000 |
| Equipment |
$12,000 |
| Soft costs |
$98,000 |
| $972,000 |
|
|
| Sources of Funding |
| Bank |
$486,000 |
50% |
| Across Nations 504 |
$389,000 |
40% |
| Equity |
$97,000 |
10% |
| $972,000 |
100% |
|
Loan #2 - Construct Addition
| Project Costs |
| Land |
$120,000 |
| Construction |
$996,000 |
| Soft costs |
$234,000 |
| $1,350,000 |
|
|
| Sources of Funding |
| Bank |
$675,000 |
50% |
| Across Nations 504 |
$540,000 |
40% |
| Equity |
$135,000 |
10% |
| $1,350,000 |
100% |
|
How is Existing Debt Handled?
- Building Acquired More Than 9 Months ago
> Existing debt added to 1st trust lender's portion of project
- Building Acquired Less Than 9 Months ago
> Bridge or Permanent Financing?
- If Bridge, include in 504 project
- If Permanent, add to 1st trust lender's portion of project
- Land - no time limit; determine if existing financing is bridge or permanent
- By new SOP : refinance are available up to 50% of Total Project cost.
| Assisted Living Facility - with existing mortgage $786,000 |
| Land |
$585,000 |
| Construction |
$3,000,000 |
| M & E |
$100,000 |
| Soft |
$215,000 |
| $3,900,000 |
|
|
| Bank |
$2,052,000 |
53% |
| Across Nations 504 |
$1,263,000 |
32% |
| Equity |
$585,000 |
15% |
| |
$3,900,000 |
100% |
|
| Total 1st Trust |
|
Equity Calculation : |
| 504 Project |
$2,052,000 |
| Existing Loan |
$786,000 |
| $2,838,000 |
|
|
| Appraised Value |
$4,024,000 |
| Existing Loan |
($786,000) |
| Available Equity |
$3,238,000 |
|
| Laundromat with existing machine loan $400,000 |
| Use of Funds |
| Purchase BLDG. |
$800,000 |
| Renovation |
$100,000 |
| Refinance Equipment |
$400,000 |
| Closing Costs |
$40,000 |
| Total |
$1,340,000 |
|
|
| Sources of Funding |
| Bank |
$536,000 |
40% |
| Across Nations 504 |
$536,000 |
40% |
| Equity |
$268,000 |
20% |
| $1,340,000 |
100% |
|
| |
| Equity Calculation : |
| Appraised Value |
$700,000 |
| Existing Loan |
($400,000) |
| Available Equity |
$300,000 |
|
| Borrower does not required any additional deposit, use existing Equity |
Where Can the Equity Come From?
- Can 504 provide 100% financing?
- How can the 0 month look-back rule be used to find equity?
- Can the equity be financed?
- Seller financing
- Other sources
| 100% Financing - Muffler Shop |
| Use of Funds |
| Land |
$75,000 |
| Construction |
$500,000 |
| M & E |
$125,000 |
| Soft Costs |
$50,000 |
| Total |
$750,000 |
|
|
| Sources of Funding |
| Bank |
$375,000 |
50% |
| Across Nations 504 |
$300,000 |
40% |
| Equity |
$75,000 |
10% |
| |
$750,000 |
100% |
|
| Land acquired 6 years ago and Appraised for $75,000 |
Capture Equity with 9-Month
Look-Back Rule
- Funds spent within 9 months of application are eligible to be included in project
- Add those dollars/assets to the 504 project and count them towards equity
- SBA can grant waivers to look back further than 9 months if it makes sense
| 100% Financing - Sandwich Manufacturer |
| Use of Funds |
| Land |
$200,000 |
| Construction |
$1,400,000 |
| Equipment |
$700,000 |
| Soft Costs |
$200,000 |
| Total |
$2,500,000 |
|
|
| Sources of Funding |
| Bank |
$1,250,000 |
50% |
| Across Nations 504 |
$1,000,000 |
40% |
| Equity |
$250,000 |
10% |
| |
$2,500,000 |
100% |
|
Note: Equipment purchases of $250,000 were made as early as 2 years before
application; waiver was granted by SBA |
Can the Equity Injection be Borrowed?
- Yes. If secured by project assets, must be subordinate to the 504 loan and have
a 20 year term with no early call.
- Repayment is over a 20 year period with no prepayment permitted
- Is subordinate to (or behind) 504 loan - Seller may provide financing (rather than traditional lender), but loan must be subordinate (behind) the 504 loan
- Borrower may use HELOC or other loan sources
| Dry Cleaner - Retail + Plant |
| Project Costs |
| Building |
$1,050,000 |
| Soft Costs |
$35,000 |
| |
$1,085,000 |
|
|
| Sources of Funding |
| Bank |
$501,000 |
46% |
| Across Nations 504 |
$434,000 |
40% |
| Equity |
$150,000 |
14% |
| |
$1,085,000 |
100% |
|
| Note: Equity provided by Seller Financing |
What is the Target Market for 504?
- Capital intensive businesses like manufacturers, printers, etc.
- Businesses requiring significant build out such as medical, dental, surgical centers
- A rapidly growing company
- A rate sensitive borrower
- An owner that wants/requires a lower down payment
- Industries that are considered higher risk by banks
How to Overcome Objections
- Program Fees - financed in 504 loan; approximately 0.5% of project costs ;
offset by below market long term rate
(adds 20b.p. on APR basis)
- Paperwork - with new streamlined SBA process, 504 requires less up front
paperwork than bank - Costs of second colsing - can be included in the project financing; not substantial
compared to low rate
- Effort of second closing - 10% down, low 20 year rate
- Rate uncertainty - can't set until funding ; historically less than prime and bank
rates - Prepayment penalty - loan can be assumed
Combining Financing Tools
- A variety of economic development tools (include SBA 7a) can be used in combination
with 504 financing to provide the best possible deal for your customer. We recommend
that you talk with our professional staffs to find out more about programs that will benefit
your customer.
| Purchase Dry Cleaner - Retail + Plant + Good will |
| 504 Project Costs |
| Building |
$1,050,000 |
| Soft Costs |
$35,000 |
| |
$1,085,000 |
| 7a Loan |
| Business Value |
$200,000 |
| $1,285,000 |
|
|
| Sources of Funding |
| Bank 504 |
$542,000 |
50% |
| Across Nations 504 |
$390,600 |
36% |
| Seller Equity (504) |
$151,900 |
14% |
| Bank (7a) |
$140,000 |
70% |
| Buyer Equity (7a) |
$60,000 |
30% |
| $1,285,000 |
100% |
|
| Note: Partial Equity provided by Seller Financing |
| |
| Total Combined Sources of Funding |
| Bank |
$682,500 |
50% |
| Across Nations 504 |
$390,600 |
34% |
| Seller Financing |
$150,000 |
12% |
| Buyer |
$65,000 |
5% |
| $1,285,000 |
100% |
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How do You Sell 504?
- Sell the Advantages to your customer
- Up to 90% financing available
- Financing can include both hard & soft costs
- Low LTV allows bank to be competitive on pricing/terms
- Bank terms may be better than conventional loan
- Below market fixed rate on 504 portion
- 20 year fully amortizing 504 portion
Advantages for First Trust Lenders
- 504 Loans meet CRA requirements
- Low loan to alue reduces risk
- Liquidity - strong secondary market willing to buy your first trust :
- To reduce concentrations
- Before you close on loans the bank doesn't want to retain in their portfolio
- Increase fee income while retaining deposit and other relationships
- Your competition will most likely present the 504 option
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