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Minnesota Business Finance Corporation

Realize your business dreams.SBA 504




TOM SAEHR (Senior Loan Officer)

NADENE KRUIZE (Vice President)








SBA 504 Certified Development Company

Working in partnership throughout our service area to foster business development and job creation and retention.

sba 504 program objectives
SBA 504 Program Objectives
  • Stimulate private sector investment to increase productivity, create new jobs and increase local tax base
  • Provide long term, fixed rate financing with a low down payment
  • Structured for healthy and expanding businesses with the highest probability of creating new jobs and competing in the marketplace
mbfc area of operations
MBFC Area of Operations

Offices in

St. Cloud,Minneapolis,



Tom Saehr

Nadene Kruize

Scott Hoeschen

Chuck Nordquist

Michelle Mueller

Jean Nelson


MBFC 504 Loan Approvals FY2006(10-01-05 to 09-30-06)

  • Loans Approved 103
  • Total Debenture $47.001,000
  • Total Project Cost $133,997,884
benefits of 504 loan third party lender
Benefits of 504 LoanThird-Party Lender
  • Risk Management Tool
  • Senior lien position
  • Loan-to-value of 50% or less
  • May sell first on secondary market
  • Bank determines pricing on conventional loan
  • Alleviates legal lending limit concerns
  • Community Reinvestment Act credit
benefits of 504 loan borrower
Benefits of 504 LoanBorrower
  • Lower equity injection (10 to 20%)
  • 10- and 20-year fixed interest rates
  • Short-term assets remain lien-free to support other financing needs
  • 10-year (equipment) and 20-year (real estate) maturities
benefits of 504 loan community
Benefits of 504 LoanCommunity
  • Job creation and retention
  • Capital investment
  • Increase tax base
  • Stimulates development
debenture project size
Debenture/Project Size
  • Debenture size
    • Most projects: $1.5 to $2 million
    • Manufacturing: $4 million
  • Project size
    • $250,000 minimum no maximum
eligible project costs
Eligible Project Costs
  • Land acquisition and new construction
  • Commercial real estate purchase and expansion
  • Acquisition of machinery and equipment
  • Contingency reserve for cost overruns (≤ 10%)
  • Professional fees
ineligible project costs
Ineligible Project Costs
  • Working capital
  • Debt refinancing
  • Franchise fees
  • Automobiles, trucks and airplanes
  • Goodwill and other intangibles
  • Equipment/furnishings < 10-year useful life
things to know nine month rule
Things to KnowNine-Month Rule

Application must be submitted to SBA within nine months of commencement of project. Purchase of land is an exception.

things to know do it yourself construction
Things to KnowDo-It-Yourself Construction
  • Situations where an applicant acts as their own contractor are typically discouraged by SBA
  • If allowed:
    • May not count “sweat equity” as borrower’s contribution toward project
    • Cost to build the building cannot include profit to applicant-general contractor
    • Estimates from independent contractors are needed to support actual costs applicant-general contractor was going to charge
    • Contractor must be experienced in this type of construction
borrower eligibility
Borrower Eligibility
  • Operating business
  • Organized for profit
  • Located within United States
  • Meets program standards
  • Demonstrate need for financing
  • Create/retain jobs or meet community development or public policy objectives
borrower eligibility18
Borrower Eligibility
  • SBA Public Policy Goals
    • Rural development (population under 50,000)
    • Women-owned business (51% or greater)
    • Minority-owned business (51% or greater)
    • Veteran-owned business (51% or greater)
  • SBA Community Development Goals
    • Create or retain one job for every $50,000 in 504 debenture funding
sba size standards
SBA Size Standards
  • Tangible net worth < $7 million and
  • Profits after tax < $2.5 million (can be average)


  • 7(a) size standards, as an alternative
  • Standards increase 25% for businesses in labor surplus area
things to know personal resources test
Things to KnowPersonal Resources Test

If Total Financing Package Owner* may retain in liquid (TFP) is: assets the greater of:

$250,000 or less $100,000 or 2x TFP

$250,001 through $500,000 $500,000 or 1.5x TFP

$500,001 or >$750,000 or 1x TFP

  • Liquid assets in excess of maximum allowed are to be injected into project cost to reduce SBA portion of financing
  • TFP = 504 project plus related financing (e.g. W/C)
  • Liquid assets include cash, marketable securities, savings, CDs, money market accounts, stocks, bonds, CVLI

(Retirement funds are excluded)

*Each owner with 20% or more ownership

ineligible borrowers
Ineligible Borrowers
  • Nonprofits
  • Finance businesses
  • Real estate development companies
  • Speculative businesses
  • Businesses located in foreign country
  • Pyramid sales distribution plans
  • Businesses with more than one-third of gross annual revenues from legal gambling
ineligible borrowers continued
Ineligible BorrowersContinued
  • Businesses and private clubs limiting membership for reasons other than capacity
  • Businesses engaged in teaching, instructing, counseling, indoctrinating religion or religious beliefs
  • Businesses that have defaulted on federal loan or federally assisted financing (including student educational loans)
  • Businesses with an associate that is incarcerated, on probation or paroled
  • Businesses involved in illegal activity
financing characteristics third party lender loan
Financing CharacteristicsThird-Party Lender Loan
  • First lien position
  • Minimum loan maturity of 7 years

(10-year debenture)

  • Minimum loan maturity of 10 years

(20-year debenture)

  • Interest rate fixed or variable

(no greater than Prime + 6%)

  • Fees customary to type of transaction
financing characteristics cdc sba loan
Financing CharacteristicsCDC/SBA Loan
  • 10-year term on equipment, 20-year term on commercial real subordinate lien
  • Fixed interest rate
  • Subordinate lien
things to know weighted average useful life
Things to KnowWeighted Average Useful Life
  • In a project with mixed-use assets, weighted average useful life calculation determines if 20-year, 10-year or two separate debentures* are available
  • If > 16 years, qualifies for one 20-year debenture
  • If < 16 years, qualifies for one 10-year debenture or two separate debentures*

* 20-year for RE and 10-year for equipment

weighted average useful life example
Weighted Average Useful LifeExample


Land/building $250,000 .50 x 20 = 10.0

Renovation $100,000 .20 x 20 = 4.0

M & E $150,000.30 x 10 = 3.0

TOTAL $500,000 1.00 = 17.0*

* Round up to 20-year debenture

financing characteristics borrower contribution
Financing CharacteristicsBorrower Contribution
  • Cash
  • Eligible land contribution, including buildings, structures and site improvements to be part of project property
  • Borrowed or received from other sources
things to know companion loans
Things to KnowCompanion Loans

MBFC can package an SBA 7(a) companion loan. They can also assist the borrower in obtaining additional project financing from economic development loan funds or other lenders.

basic 504 loan structure
Basic 504 Loan Structure
  • Financing contribution
    • Third-party lender provides 50%
    • CDC/SBA provides 40%
    • Borrower provides 10%
  • Factors impacting contribution
    • Start-ups = 15%
    • Special-purpose real estate = 15%
    • Both start-up and special-purpose RE = 20%
50 40 10 loan structure standard
50/40/10 Loan StructureStandard
  • Existing business
  • No special-purpose real estate
  • Good credit risk
  • Project cost = $1,000,000

Third-Party Lender First Mortgage $ 500,000 50%

SBA Second Mortgage $ 400,000 40%

Borrower Cash Contribution $ 100,000* 10%


* may include gap financing

50 35 15 loan structure hotel pool expansion
50/35/15 Loan StructureHotel Pool Expansion
  • Seasoned, existing business
  • Hotel = special purpose real estate, 5% additional needed
  • Assumes cash vs. land equity contribution
  • Project cost = $1,000,000

Third-Party Lender First Mortgage $500,000 50%

SBA Second Mortgage 350,000 35%

Borrower Contribution 150,000* 15%


* may include gap financing

50 30 20 loan structure start up convenience store
50/30/20 Loan StructureStart-Up Convenience Store
  • Start-up = 5% additional contribution needed
  • Convenience store = special purpose real estate; 5% additional needed
  • Project cost = $1,000,000
  • Inventory/working capital = $30,000 needed


Third-Party Lender First Mortgage $500,000

SBA Second Mortgage 300,000

Borrower Contribution 200,000*

Gap Financing W/C Inv. 30,000

$1,000,000 $30,000

* may include gap financing

40 40 20 loan structure extra borrower s contribution
40/40/20 Loan StructureExtra Borrower’s Contribution
  • Not a start-up or special purpose real estate, qualifies for 50/40/10 structure
  • Borrower injects 20% vs. 10% required
  • Excess contribution may reduce TPL share
  • Project cost = $1,000,000

Third Party Lender First Mortgage $ 400,000 40%

SBA Second Mortgage $ 400,000 40%

Borrower Contribution $ 200,000* 20%


*may include gap financing

sample 504 loan structure grossing up
Sample 504 Loan Structure“Grossing Up”
  • Borrower wants to utilize existing land/building equity for all or part of contribution, seeks financing for up to 100% of project costs
  • Project cost = $1,000,000
  • Grossed up = $1,111,111 ($1,000,000/90% LTV )

Typical 50/40/10 Grossed Up 50/40/10

$ 500,000 Third Party Lender $ 555,556

$ 400,000 SBA $ 444,444

$ 100,000 Borrower Contribution $ 111,111

$1,000,000 Total $1,111,111

epc and operating company requirements
EPC and Operating Company Requirements
  • OC is a Co-borrower
  • Assignment of lease as collateral
  • Lease term > than loan term
  • EPC and OC are affiliates; must meet size standards
  • This is a loan to EPC for the benefit of OC; rent is limited to PITI and maintenance.
  • Ownership of EPC and OC need not be identical.
things to know personal guaranties
Things to KnowPersonal Guaranties

SBA policy on all loan programs is to require:

  • Unlimited personal guaranties of all persons owning 20% or more interest
  • Limited personal guaranties of all persons owning five to 19%interest
things to know occupancy
Things to KnowOccupancy
  • Existing building
    • Borrower and operating company (OC) must occupy at least 51% initially
    • Borrower and OC may lease out up to 49% of additional rentable property indefinitely
  • New construction
    • Must occupy at least 60% of rentable property
    • May lease out up to 20% of rentable property indefinitely
    • Must plan to occupy some of remaining space within three years, all remaining unleased space within 10 years
504 fee structure
Due with loan application:

A. Refundable Deposit = < of 1% of loan amount or $2,500

Fees financed into debenture:

A. Reserve Amount = .50% of Net Debenture Proceeds

B. Funding Fee = .25% of Net Debenture Proceeds

C. CDC Processing Fee = 1.50% of Net Debenture Proceeds

D. Closing Costs = $2,500

E. Sum of (A - D) = $ x

F. Underwriter’s Fee = Add Net Debenture Proceeds plus [$x from E]; divide by .99500; round to the next highest thousand; multiply by .005; = underwriter’s fee

504 Fee Structure
504 fee structure39
504 Fee Structure

Ongoing fees included in note rate:

  • Servicing Fee – Colson .100%
  • Servicing Fee – MBFC .500 %
  • Servicing Fee – SBA .125%
  • Subsidy Fee – SBA .018%
things to know prepayment premium for a 20 year loan
Things to KnowPrepayment Premium for a 20-Year Loan*

If the loan is Payment is percentage of

prepaid in: outstanding balance:

Year 1 105.90%

Year 2 105.31%

Year 3 104.72%

Year 4 104.13%

Year 5103.54%

Year 6 102.95%

Year 7 102.36%

Year 8 101.77%

Year 9 101.18%

Year 10 100.59%

After year 10 100% (no prepayment penalty)

*assuming debenture rate of 5.9%

things to know prepayment premium for a 10 year loan
Things to KnowPrepayment Premium for a 10-Year Loan

If the loan is Payment is percentage of

prepaid in: outstanding balance:

Year 1 105.90%

Year 2 104.72%

Year 3 103.54%

Year 4 102.36%

Year 5101.18%

After Year 5 100.00%

(no prepayment penalty)

* assuming debenture rate of 5.9%


Loan Process

  • Call/visit with MBFC staff
  • Prepare application
  • MBFC loan approval
  • SBA loan approval
  • SBA issues authorization/loan agreement
  • Project completed
  • SBA 504 loan closing and funds are disbursed by bank
  • Debenture sells — SBA 504 loan funds
application checklist
Application Checklist
  • Financial information
  • Business information
  • Business organizational documents
  • SBA forms
  • Information provided by lender
  • Refundable deposit
credit criteria
Credit Criteria
  • Repayment ability
  • Collateral
  • Management
    • Change in day-to-day management = start-up
  • Financial ratios
    • Leverage
  • Working capital adequacy
things to know interim financing options
Things to KnowInterim Financing Options
  • Lender finances two notes and two mortgages:
    • First note equals permanent TPL loan amount permitted in SBA authorization
    • Second note equals interim financing amount permitted in SBA authorization (mortgage is interim financing, paid with net debenture proceeds)
  • Lender finances one note and one mortgage:
    • Note equals sum of interim financing plus TPL loan amount permitted in SBA authorization
    • (Net debenture proceeds reduce principal balance of TPL’s note, to amount permitted in SBA authorization for permanent TPL loan)
things to know life insurance
Things to KnowLife Insurance
  • Borrowers required to pledge a collateral assignment of life insurance in amount equal to debenture amount
  • Life insurance must be pledged on owners/persons key to operation
  • Assignment of existing policies or decreasing-term policies are acceptable
things to know title insurance policies
Things to KnowTitle Insurance Policies

Title insurance is needed in amount equal to gross debenture amount:

  • MBFC and SBA and/or successors and assigns as their interest may appear
  • Should be ALTA loan policy without standard exceptions (or “Extended ALTA” policy)
  • Standard survey exception must be deleted
  • Liability non-cumulative condition: Lender and MBFC will discuss if both use same title insurance policy
things to know
Things to Know
  • Collateral assignment of life insurance required on SBA portion
  • Borrower’s attorney’s opinion needed following loan closing
things to know environmental policy
Things to KnowEnvironmental Policy
  • Based on project characteristics (prior uses of property, industry of borrower, etc.), appropriate level of environmental investigation will be determined
  • Any existing reports need to be dated within six months of application.
things to know third party lienholder s agreement
Things to KnowThird-Party Lienholder’s Agreement

Third-Party Lender required to sign Third-Party Lienholder’s agreement that confirms:

  • TPL’s and MBFC’s lien positions
  • TPL’s prepayment penalties, late fees, default interest or other default charges are subordinate to SBA
  • Future advances, further encumbrances, cross- collateralization and cross-default may not result in SBA being further subordinated
  • No early call or balloon payments are allowed prior to standard terms of lender
things to know third party lender s fee
Things to KnowThird-Party Lender’s Fee

1/2% fee on project mortgage(s) senior to SBA-guaranteed mortgage. Paid to Colson via MBFC at time of closing. Cannot be paid with debenture proceeds.

sba funding
SBA Funding
  • Funding occurs approximately two months after closing
  • Loan payments debited from borrower account via ACH on first day of the month following funding
  • Contact an MBFC loan servicing officer for changes/questions after funding
servicing requests
Servicing Requests
  • Collateral release, substitution or subordination
  • Assumption
  • Deferments
  • Guarantor changes
  • Changes to loan conditions or covenants
sba 504 the money that makes america work
SBA 504 … The Money That Makes America Work

To learn more or apply online, visit

Or call our offices:

St. Cloud: (320) 258-5000

Bemidji: (218) 759-8481

Minneapolis: (612) 746-6900