BANKERS


Financing Structure

Model 504 Financing Structure
Total Project Cost $1,000,000

Source	Amount	%
Private Sector First Mortgage/Lien	$500,000	50%
SBA 504 NET Debenture Proceeds	$400,000	40%
Borrower's Equity (minimum)	$100,000	10%
Total Project Cost	$1,000,000	100%

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	5.05%
	+ Spread to investor	0.75%
	= Debenture Rate	5.80%
	+ SBA subsidy cost	0.021%
	+ CSA fee	0.10%
	+ CDC Servicing fee	1.00%
	= Total	6.92%

Prepayment Penalty

• 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.

Credit Criteria

Repayment Ability

• Based upon existing financial statements of the applicant. Can the additional debt be paid based on historical cash flow?
• Generally a cash flow coverage ratio of 1.25:1 or better is considered desirable.
• Rental income can be considered if verifiable.

Collateral

• 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)

Secondary Collateral

If conditions are not met, SBA must consider these alternatives;

• Pledged 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

Other Issues

• 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 be 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 an in accordance with plans, specs, and appraisal.
• Assure that project is in compliance with local, state, and federal mandates
• Architect
• 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 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 Dictates by State Law (usually every 5 years)
• Routine Field Visits
• Borrower Compliance with other Loan Covenants
• Work with Colson Services to collect monthly payments
• Work with borrower and SBA to respond to special servicing requests
• Release of Collateral
• Subordination or Substitution of collateral
• Assumption
• Prepayments (penalties may apply)
• Work with borrower and SBA in cases of troubled loans; Delinquent Status and Liquidation
• Workouts, Deferrals, and Other remedies
• Bankruptcy
• CDC roles in liquidation