SBA504THEBESTKEPTSECRETINCOMMERCIALREALESTATEFINANCINGRYANRICHARDSON– LOANPROGRAMMANAGER

WHOAREWE?

• SuperiorCaliforniaEconomicDevelopment• RyanRichardson,LoanProgramManager

• Wehelpsmallbusinessownerspurchaseowner‐occupiedcommercialrealestatewiththelowestdownpaymentthroughtheSBA504loanprogram.

• Areasofoperations– Redding,Chico,BayArea&occasionallySouthernCalifornia

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WHATISTHEPURPOSEOFTHESBA504?

• EconomicDevelopmenttoolfortheSBA

• SBA504borrowersgetbetterterms,betterpricing,andoverallbetterloanstructuresavingCAPITAL

• Whatdotheydowiththecapital?• Growtheirbusiness• Hireadditionalemployees• Createswealthforsmallbusinessowners• Helpsthewholeeconomy

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WHYAMIINVOLVEDINTHEPROCESSANYWAY?

• CertifiedDevelopmentCompany(CDC)• SBAnotprofessionallenders• CertifiedbySBAtomarket,underwrite,closeandserviceloansontheirbehalf

• Whydoesn’tthebankjustdoit?• SBA504hastwoseparateloansunlikeSBA7(a)whichguaranteesthebankloan• BankhastheirinterestandCDCisresponsibleforSBA’sinterest• I’mheresothebankdoesn’thavetobetheexpert

• WhenshouldIgetinvolvedinthelendingprocess?

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WHATDOIREALLYDO?

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Marketing Underwriting Approval Closing Servicing

KEYADVANTAGESTOTHESBA504LOANPROGRAM

• LowerDownPayment

• BelowMarketInterestRate

• 20‐YearLoanwithaFixedInterestRate

• FinanceSoftCosts

• IncreasedROIforbuyers

• WallStreetMoneyforMainStreetBusinesses

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WHATCANBEFINANCEDWITHSBA504LOANS

• Owner‐OccupiedCommercialRealEstate• Existingbuildings• Land/buildingconstruction• Addition/minorrenovation

• LongLifeFixedEquipment

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ELIGIBLEPROJECTCOSTS

SoftCosts HardCostsPoints&closing costs CommerciallandConstruction‐period interest ExistingbuildingAppraisalreports Land&constructionofabuildingEnvironmentalreports MachineryArchitecturalcosts EquipmentEngineering costs FurnitureConstructioncontingencies Fixtures

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HOWTORECOGNIZEASBA504PROJECT–5QUESTIONS

1. Isitowner‐occupiedcommercialrealestate?

2. Doestheborrowerhavethedownpayment?

3. Isthereenoughcashflowtocoverdebtservice?

4. Isthebusinessfor‐profit?

5. Isbusinesstangiblenetworthlessthan$15MMandPATof$5MM?

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Icanhelpwiththis!Youdon’thavetobetheexpert.

ISITOWNER‐OCCUPIEDCOMMERCIALREALESTATE?

• 51%Existingbuilding

• 60%Newconstruction

• Eligiblepropertytypes:• Officebuildings• Officecondos• Warehouse• Hotels/motels• Gasstations• Residentialproperty(forcarehomes)• Specialuseisokay!

• Ineligiblepropertytypes:• Apartmentbuildings• Investmentproperties• Landbanking

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ISITOWNER‐OCCUPIEDCOMMERCIALREALESTATE?

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DOESBORROWERHAVETHEDOWNPAYMENT?

• Traditionally50/40/10split

• Ifspecialpurpose:• 50%/35%/15%

• Ifnewbusiness:• 50%/35%/15%

• Ifnewandspecialpurpose:• 50%/30%/20%

• Questions:• Canthedownpaymentbeborrowed?• Canitcomefromretirement?• Canitjustshowupatescrow?

• TIP:BorrowerneedscashtorunthebusinessAFTERthedownpaymenttoo!

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ISTHEREENOUGHCASHFLOWTOCOVERDEBTSERVICE?

• Lookingforlasttwoyearsandinterimtoshowpositivecashflowat1.25:1

• Mostborrowersaretradingaleasepaymentforownership.

• Projectionsareokayforexpandingandnewbusinesses

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STRUCTURINGADEAL

• Purchaseland&building‐ $650,000

• Purchaseequipment‐ $120,000

• Professionalfees‐ $7,250

• Otherexpenses‐ $3,500

• TotalProjectCosts‐ $780,750

• Typical50%/40%/10%

• Bank– 50%‐ $390,375

• CDC/SBA– 40%‐ $312,300

• Borrower– 10%‐ $78,075

• Total‐ $780,750

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CallRyan– 225‐2760x206

HOWMUCHCANTHEBUYERBORROW?

• Quickruleofthumb:10Xdownpayment

• DSCRat1.25:1

• BreakevenRentCalculation

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SELLTHEBUILDINGWITHFINANCING

• Marketingflyers• We’llmakethemandsendyouaPDF• Letusassistwithyourmarketing

• BetterROIforbuyers• Costofinvestment– SBA504– 10%• Costofinvestment– Commercial– 20%• ROI=(gainfrominvestment– costofinvestment)/costofinvestment

• TIP:SBA504preservesworkingcapitalallowingthebuyertoexpandthebusiness!

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SECRETSOFSBA504APPROVAL

• Doesitcashflow?

• Doestheborrowerhavethedownpayment?

• Doestheborrowerhaveexperience?

• DoesitmeetSBAeligibilityrequirements?

• TypicalBorrower• Ownedbusiness2‐5years• Usuallyhas7‐10yearsofindustryexp.• Currentlyleasesandisreadytograduatetoownership

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SBAMYTH#1– SBATAKESTOOLONG

• Notyourgrandfather’sSBA

• Centralizedprocessingspeedsitup

• Electronicsubmissionofpackages

• Racewithcommercialcounterparts

• TIP:Environmentalandappraisaltakelongerthanapprovals

• TIP:Submitacompleteapplicationpackage

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SBAMYTH#2– SBALOANSHAVETOOMUCHPAPERWORK

• Onlytwoorthreemoredocumentsthanwithacommercialloan

• BankandIsharedocumentationtoreduceborrowerburden

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SBAMYTH#3– SBALOANSAREONLYFORTHEWORSTBORROWERSORFORSTART‐UPS

• The504isSBA’spremierlendingproduct

• Primarilyusedbysuccessfulbusinessesthathavebeenaroundforanumberofyears.

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SBAMYTH#4– SBALOANSHAVETOOMANYFEES

• HoldoverfromSBA7(a)

• Therearefees,buttherearefeesoneveryloan

• Approximately2.65%ofSBAloan+$2,500

• SBA504feesarefinancedintotheSBAportionoftheloan

• LTCvs.LTV

• Buyingafixedratefor20‐years

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SBAMYTH#5– SBALOANINTERESTRATESAREHIGHERTHANCONVENTIONALLENDING’SRATE

• MostofthetimetheSBA504rateislowerthanthebankrate

• Rightnowisoneoftheraretimewhereitisnot

• SBA504loansfundedonamonthlybasis

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SBAMYTH#6– SBALOANSREQUIREALIENONTHEBORROWER’SHOME

• SBA7(a)holdover– NOTthecasewithSBA504

• Typicallyweonlytakethesubjectpropertyascollateral

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SBAMYTH#7– BUSINESSOWNERSCANONLYGETONESBALOAN

• Aborrowercanborrowerupto$5millionfromtheSBA

• Canbemultipleloans

• Canbeacombinationof504and7(a)

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SBAMYTH#8– BECAUSESBALOANSAREAGOVERNMENTPROGRAM,ALLSBALENDERSARETHESAME

• Thiswouldbelikesayingallcommercialrealestateagentsarethesame

• YouhavetobeintheSBA504gametobeproficientandprofessional

• Dealingwithaspecialist

• Onepersonguidesthetransaction

• We’relargeenoughtobecompetent,butsmallenoughthatyourloanmatters

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SBAMYTH#9– GETTINGASBALOANISLIKESTEALINGFROMTHEPOORANDONLYNEEDY,MINORITYRUNBUSINESSOWNERSSHOULDAPPLYFORTHEM

• Thereisn’tabigbagofgovernmentmoneyoutthereforthepoor,minorities,womenorveterans.

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SBAMYTH#10– THEREISA$6MILLIONREVENUELIMITTHATISIMPOSEDBYLENDERSINDECIDINGWHOGETSLOANS

• NorevenuelimitonSBA504

• SBA7(a)usedtohavesuchalimit

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PITFALLS!

• Franchises– eligible,buttakeextratime

• GasStations– eligible,buttakeextratime

• Propertieswithenvironmentalissues–AVOID!!!

• SBAForm912– StatementofPersonalHistory

• Shortescrowtimes• Commercialappraisalstaketime

• Tryingtogotoofaroutofthebox

• Notaskingmeifitiseligible– moreprojectsareeligiblethanyouthink!

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FAQS–WHATISTHEAPPROVALPROCESS?

• SCEDloancommitteeapprovesloan

• SubmittoSBASacramentoLoanProcessingCenter(SLPC)

• SBAreviewsapplicationpackageforeligibilityandoccasionallycredit

• SBA504Authorization

• SBAapprovesEnvironmentalReport

• SBAapprovesAppraisal

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FAQS– HOWLONGDOESITTAKE?

• Underwriting2‐4weeksfromcompleteapplicationpackage

• SBAAuthorization– 10businessdaysaftersubmission

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FAQS– HOWDOISTRUCTUREASBA504?

• CallmeandI’lldoitforyou

• Pluswecanchatabouteligibility

• Icansharespreadsheetifyou’reinterested

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FAQS–WHATISMYRATEGOINGTOBE?

• Wewon’tknowuntilthebondfundingtheloanissold

• Interestraterisk

• Follows10‐YearTreasury

• Longtermfixedrateiskeytofocuson

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FAQS–WHATSIZEPROJECTSCANYOUDO?

• SBAportionmaxesoutat$5millionsowe’reabletodoaround$20million

• Ihavea$22millionprojectapproved

• Smallestprojectsize?• $400,000

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FAQS– ARESPECIALUSEPROPERTIESOKAY?

• Gasstations

• Hotels/motels

• CarWashes

• AssistedLivingFacilities

• Autoservicecenters(oil&lube,brakeortransmissioncenters)withpits

• Hospitals

• Farms

• Notconsideredspecialuse:• Mini‐storages• Restaurants

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FAQS– ARESTARTUPSELIGIBLE?

• Widevarietyofstartups

• Needtohaveindustryexperience

• Ownershipexperienceisahugeplus

• Businessplanandprojections(withassumptions)willbeneeded

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FAQS–WHATISUSEDASCOLLATERAL?

• Typicallyjustthesubjectproperty

• Banktakesa1st DTandSBAtakesa2ndDT

• Personalguaranteesofprincipals

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FAQS– HOWMUCHOFADOWNPAYMENTISNEEDED?

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• Traditionally50/40/10split

• Ifspecialpurpose:• 50%/35%/15%

• Ifnewbusiness:• 50%/35%/15%

• Ifnewandspecialpurpose:• 50%/30%/20%

FAQS– CANIUSETHISTOFLIPPROPERTIES?

• SBA504loanshavea10yearprepaymentpenalty

• Loanisusedtofinancelong‐termfixedassets

• Ihaveaspreadsheetthatexplainingtheprepaymentpenalty

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FAQS– HOWDOIKNOWIFABORROWERWILLQUALIFYFORASBA504?

1. Isitowner‐occupiedcommercialrealestate?

2. Doestheborrowerhavethedownpayment?

3. Isthereenoughcashflowtocoverdebtservice?

4. Isthebusinessfor‐profit?

5. Isbusinesstangiblenetworthlessthan$15MMandPATof$5MM?

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FAQS– HOWDOIGETSTARTED?

RyanRichardson

LoanProgramManager

530‐225‐2760x206

530‐722‐5726

rrichardson@scedd.org

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