The SBA 504 program serves both the Business Banking segment as well as the Middle Market segment.
Model 504 Financing Structure
Total Project Cost $1,000,000
|Private Sector First Mortgage/Lien
|SBA 504 NET Debenture Proceeds
|Borrower's Equity (minimum)
|Total Project Cost
Equity or Local Injection (Structure Guidelines)
- Minimum is usually 10%
- Limited use or start up 15% (or both 20%)
- In the form of cash or equity in real estate
- Usually required of the buyer
- May be a loan from CDC or other lender (rare); if secured it must be a subordinate to CDC/SBA, and private sector lender (Term should/must be same or longer)
CDC/ SBA (Structure Guidelines)
- Maximum is usually 40% of eligible project costs
- Takes a lien subordinate to the private sector lender on assets pledged as collateral for the loan
- Can offer either 10 or 20 year terms (depending upon the assets financed)
- Provides a fixed interest rate loan
- CDC issues a debenture (bond) that is guaranteed 100% by SBA
Private Sector Participants (Structure Guidelines)
- Usually a bank; must have experience at this type of lending.
- May take the priority lien on assets pledged as collateral.
- Must offer term of 10 years if debenture is 20 years (or 7 if debenture is 10 years)
- May set rate and fees (legal and reasonable)
- Their loan cannot be guaranteed by SBA
Debenture Pricing Model
|10 year treasury
|+ Spread to investor
| = Debenture Rate
|+ SBA subsidy cost
|+ CSA fee
|+ CDC Servicing fee
| = Total
- No partial payments allowed
- Loan is assumable and collateral can be substituted
- Funds can be placed in escrow account to ensure repayment
- Payment penalty is based on predetermined schedule, based upon the rate of the underlying (debenture) bond.
- Based upon existing financial statements of the applicant. Can historical cash flow cover the additional debt?
- Generally a cash flow coverage ratio of 1.25:1 or better is considered desirable.
- Rental income can be considered if verifiable.
- Second Mortgage (Trust Deed) on Real Property
- Second lien on Personal Property (SBA would prefer a first lien on mixed use projects)
- Personal Guaranty required of any 20% or more owner (of EPC and OC)
If conditions are not met, SBA must consider these alternatives;
- Pledge of additional collateral including personal residence or other real property. (Inventory and accounts receivable not acceptable)
- Borrower to inject more equity than statutorily required minimum
- If borrower is unable or unwilling to provide additional collateral, loan may be declined
- Life Insurance may be required if management does not display appropriate depth and succession.
- Environmental Issues: Environmental Questionnaire, Transaction Screen Analysis, or Phase 1 and 2 necessity is determined by lender and CDC.
- Appraisals: Usually addressed to Lender, SBA and CDC. Ordered by Senior Lien holder.
Responsibilities of the CDC
CDC Responsibilities at Closing
- Obtain proof that Project is complete and in accordance with plans, specs, and appraisal.
- Architect and/or Appraiser
- Government Entities (Certificate of Occupancy)
- Obtain assurance that project is in compliance with Earthquake codes, Building codes, and Zoning Compliance
- Obtain proof that M&E and F&F have been purchased in accordance with authorization. (model and serial numbers)
- Obtain evidence of Hazard, Life, and Flood Insurance as appropriate
- Obtain evidence of Borrower's Injection of required equity.
- Obtain evidence that interim loan is fully disbursed, used in accordance with authorization and that no material liens exist.
- Verify borrower occupancy
- Verify that Borrower has not suffered an Adverse Change in Financial condition.
- Verify tax returns with IRS, Good Standing of Corporation, etc as listed in authorization.
CDC Servicing Responsibilities
- Routine Regular Servicing Activities
- Hazard Insurance Coverage on Collateral Property
- Payment of annual property taxes
- Review of Business Financial Condition
- Job Creation and Economic Development Impact
- Renewal of UCC Liens as Dictated by State Law (usually every 5 years)
- Routine Field Visits
- Borrower Compliance with other Loan Covenants
- Work with a Central Servicing Agency to collect monthly payments
- Work with borrower and SBA to respond to special servicing requests
- Release of Collateral
- Subordination or Substitution of collateral
CDC Roles in Liquidation
- Work with borrower and SBA in cases of troubled loans; Delinquent Status and Liquidation
- Workouts, Deferrals, and Other remedies