Business Finance Capital Loan Structures
Typical loan structures and proposed SBA 504 loan details, along with project eligibility criteria, definitions for new businesses, and affiliation rules. Gain insights into financing options for commercial real estate projects.
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Presentation Transcript
Typical Loan Borrower 10% Total Project Costs $1,000,000 Bank Loan 50% 504 Loan 40% $500,000 $400,000 $100,000 10 Yr Maturity., 25 Yr Amort. Negotiable Rate 20 or 25 Yr Fully Amortized Fixed Rate Bond Borrower Equity Contribution
Proposed SBA 504 Loan Structure $1,995,00 Total Purchase Price Building Acquisition SBA/CDC Fees Total Project Cost $1,995,000 $21,000 $2,016,000 Borrower 10% 504 Loan 40% Rates: Bank: SBA 504: Rate is estimated will vary depending on lender. Rate is FIXED at the time of debenture sale. Fees: Collateral: 90% financing generally does not require additional collateral. Bank: SBA/CDC: Misc: Varies depending on lender policy. 2.15% of SBA loan plus legal fees are financed, and therefore included in the SBA loan amount. Related costs may be included in the SBA 504 loan including: Appraisal, Environmental report (if required), and escrow closing costs (including insurance and legal closing costs.)
Project Eligibility Occupancy Existing Building 51% New Construction 60% 20% permanently leased 20% to be occupied in 10 years Project Size Min = $200,000 Max = No max projectsize Max 504 Loan: $5,000,000 for most loans $5,500,000 for manufacturers & certain energy efficient projects Down Payment Typical 10% New Business 15% Special Use 15% Both 20% Bank Loan can exceed50% Projects could be as large as $20+ million
New Business Definition Change When an existing business starts or acquires a business that is in the same 6-digit NAICS code with identical ownership and in the same geographic area as the acquiring entity and they are co-borrowers, SBA considers this to be a business expansion and not a new business. Note: SBA clarified that all 4 points must be met: 1) Same NAICS code 2) Identical ownership 3) Same geographic area 4) Co-Borrowers This means if 1 (or more) of the points are not met, then it is a new business (which requires an additional 5% borrower injection). SBA also clarified that the acquiring entity must be Co-Borrower (Guarantor is not acceptable in lieu of a Co-Borrower).
Affiliation When a business holds more than 50% ownership of an Applicant, that business is affiliated with the Applicant. If the said business owner, with over 50% ownership in the Applicant also holds more than 50% of another business operating in the same 3-digit NAICS subsector as the Applicant, all three entities the owner s business, the other business, and the Applicant are all considered affiliates. If an individual owns more than 50% of the Applicant and also owns more than 50% of another business in the same 3-digit NAICS subsector as the Applicant, both the Applicant and the individual s other business are affiliated.
Affiliation (cont.) In cases where the Applicant lacks an owner with over 50% ownership, if an owner with a 20% or more stake in the Applicant is a business operating in the same 3-digit NAICS subsector as the Applicant, both the Applicant and the owner are considered affiliated. Ownership interest of spouses and minor children are combined when determining the total ownership interest.
Affiliation Example Company NAICS Code Ownership Affiliate 50% Borrower 1 50% Borrower 2 Operating Company 721110 85% Borrower 1 10% Borrower 2 5% Other Company A 721110 YES NO 50% Borrower 1 Company B 721110 50% Other NO 37.5% Borrower 1 37.5% Borrower 2 25% Other Company C 721110 NO 100% Borrower 1 Company D 531120 NO 50% Borrower 1 50% Borrower 2 Company E 721110 51% Borrower 1 49% Borrower 2 Company F 721110 YES
Related Non-Affiliates The CDC s credit memo must document all owned/partially-owned entities as either an Affiliate or Related Non-Affiliate. For all non-affiliates, the most recent Schedule K-1 must be provided. If the entity is a C-Corp, collect its most current tax return. If the net income is positive per the Schedule K-1 (or per the C-Corp s tax return), CDC must explain the positive net income in the CDC s credit memo, which suffices to confirm the entity is not a drain on the applicant or principal. If the entity shows a net loss, take the following further steps: Explain why is there a net loss? How is the loss being covered? Can a current interim profit & loss statement be provided which shows positive net income? CDC must explain and prove to SBA that the Related Non-Affiliate is not a drain to the applicant or principal.
Current Processing Time New Purchase Applications: 2.8 business days New Refinance Applications: 3.9 business days Servicing Actions: 2.7 business days Environmental reviews: 2.4 business days * Note that that these turn times are based on the date of receipt of the loan to the date of approval for those loan that did not go through a second compliance check. The loans that had to go through a second compliance check had an average increased time of 1.43 days which is the wait time for the compliance check to be done at funding and the time it takes for SLPC to be notified that it funded and the T&C prepared.
ETRAN Error Codes ETRAN Compliance Check Codes Went live on ETRAN on August 18, 2023 Applicable for any 7a and 504 loan Purpose is to alert lenders of Compliance Check codes that will be issued at time of submission. There is no clearing of codes at pre-check. Informational only Error 4363: Introduced August 1, 2023 to flag individuals/entities with potential compliance issues on existing SBA loans This error checks for hold codes on other SBA loans such as PPP and Covid EIDL This validation must be resolved to proceed with the application 7a Lenders and CDC s can contact 7aComplianceCheck@sba.gov to request resolution What to do: Borrowers should confirm that all PPP loans have been forgiven. Borrowers should confirm all EIDL loans are in paying status. Borrowers should login to their SBA portal (https://lending.sba.gov/) and confirm all loans are current. If any loans have charged off status, etc., the borrowers must take action to bring them to current status.
Character Determination Character Determinations and loans to businesses with associates who have Criminal Background SBA removed the requirements to complete Character Determination for these individuals.
Character Determination (cont.) Per SOP 50 10 7, there are no additional documentation or clearance procedures required for a yes answer to question 1244, question 4. The applicant s no answer to 1244, question #2 satisfies eligibility ( Are you presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction? ) If the applicant answers yes to question #2, then the applicant is not eligible for SBA assistance.
Refinance Needs List Refi Questions 1. What is the estimated appraised value of the property? 2. Does the OC occupy at least 51% of each parcel of the project property? 3. For each debt/lien on the subject property that needs to be refinanced, identify the use of proceeds. If the loan was refinanced one or more times, identify the use of proceeds of the original loan. 4. If the Qualified Debt s use of proceeds was construction, what is the date of the last disbursement? (must be at least 6 months ago)
Refinance Needs List (cont.) Refi Docs All promissory notes (original note and any refinances modifications, changes in terms) Transcript of loan payments for the last 12 months for the debt through October 2023, which includes: The identity of the lender, Payment Due amount, Date payment is due, Date payment is made/posted, Amount of payment, Original balance, Remaining/current balance, Any late fees Recorded Mortgage Deed of Trust for lien verification (if Equipment: provide UCC-1 filing) Refinancing an existing 7(a) or 504 loan: Provide the best contact name and email for the existing lender (or existing CDC, if 504). BFC must notify them that BFC is refinancing their loan. If the original loan or current loan is a 7(a) loan, provide the SBA 7(a) Disbursement document showing the Use of Proceeds breakdown. If requesting cash out for Eligible Business Expenses , provide an itemized list.
Refinance Needs List (cont.) If the debt was used to acquire equipment: o If the CDC can demonstrate that the commercial real estate provides adequate collateral protection for the SBA, any liens on machinery and equipment purchased with proceeds of the original loan can be waived. o If the real estate collateral is inadequate: Provide the equipment list (BFC or Bank must order an Equipment Appraisal) If we are financing the prepayment penalty fees, provide a statement that includes prepayment penalties (including subsidy recoupment fees), financing fees, & other financing costs added to the amount being refinanced. If available: Original Purchase Sale Agreement with any amendments If available: For real estate acquisition: Buyer s Final Escrow Settlement Statement (For construction: construction/loan agreement, construction ledger disbursement sheet / AIA draw sheets that breaks down the use of proceeds.)
Notable Changes for Refinances in SOP 50 10 7.1 1. Removed 7a decline letter from current bank 2. Lowered substantially all test to 75%/25% 3. Don t need 327 to change loan amount to match amortized debt
Refinance Importance of Final Disbursement For a 504 Refinance project with a Qualified Debt that had a construction loan use of proceeds, the loan must be fully disbursed. The last and final disbursement date must be evidenced by the loan payment transcript. The debt is only eligible to refinance 6 months after the final disbursement date. The documentation requirement for a transcript from a financial institution is: Transcript of loan payments for the last 12 months for the debt through the present, which includes: The identity of the lender, Payment Due amount, Date payment is due, Date payment is made/posted, Amount of payment, Original balance, Remaining/current balance, Any late fees. If the loan has been in existence for less than 12 months, provide the transcript for the total number of months it has been in existence. The documentation requirement for a transcript from a private lender is: 12 months of bank statements showing the payments. The private lender should also provide a signed letter which confirms the applicant has been current on all payments due for the last 12 months and also indicate the current balance of the loan.
Debt Refinance with Other Secured Debt Company A 2021 Under the 504 Debt Refinance without Expansion program, the project request was to refinance an $8,000,000 loan that was used to acquire the subject real estate. The subject real estate was secured by a $2,000,000 debt whose use of proceeds was working capital; thus, it was considered an ineligible project cost (non-project debt or other secured debt ). In this scenario, the borrower was provided with 2 options: 1) Pay off the $2,000,000 non-project debt; or, 2) Lender on the $2,000,000 non-project debt must subordinate the debt. The borrower chose option #1. CDC added the payoff condition to the SBA Terms & Conditions.
15% Renewable Energy Projects Company B 2022 (Parking Lot) SBA issued approval for an $11,200,000 parking lot purchase project. The OC s office location (owned) was located adjacent to the parking lot and had insufficient parking. The majority of the employees were forced to park at the project property parking lot, thus our applicants decided to purchase the parking lot. The subject parking lot project met SBA s renewable energy goal. The renewable energy cost (solar lights and panels) was included as part of the project. The energy report concluded: At the time of this assessment report a solar PV contractor and installer has provided a proposal for a compliant car port PV system. The proposed design will generate an average of over 100% of onsite energy usage, which equates to 12,192kWh/yr. The solar array is to be placed on Car Ports and is included in the cost of the solar quote. details of this proposed design are included in this report. It is the official opinion of FRE that this proposed solar PV design will meet the public policy energy goals if implemented. In addition, any design in which the vendor can demonstrate will produce an average of 4,018 kWh or more would also meet the public policy goals of more than 15% renewable energy production.
Release of 7a additional collateral Company C 2022 504 refinance can be used to release 7(a) additional collateral. The eligibility requirement is the collateral is, at a minimum, the same as for the original eligible loan. However, when the additional collateral was taken in abundance of caution to meet SBA 7(a) requirements (it was not Project Property acquired with loan proceeds), SBA would apply the same standard to additional collateral taken by an SBA 7(a) lender as an abundance of caution in the same manner as the 504 currently review additional collateral taken by a 504 lender as per 13 CFR 120.920(b). Purchase Price $1,800,000 SBA 7a Loan Amt (purchase) $1,480,000 SBA 7a Loan Amt (construction) $989,000 Collateral Building, SFR of each borrower
Release of 7a additional collateral (cont.) Company C 2022 Appraised Value - 2022 $3,000,000 Debt refinance (purchase) $1,374,344 Debt refinance (construction) $808,804 Professional fees $13,788 Equity $803,064 Collateral Building Bank 1st TD $1,375,000 (46%) SBA 2nd TD (net) $821,936 (27%) SBA 504 provided a 25 year fixed rate on the 2nd TD
Seller Tax Returns Requirement for Business Acquisition Company D 2023 Per the SOP: "For a change of ownership, the CDC must verify the seller s business tax returns or a sole proprietor s Schedule C. Where there is an acquisition of a division or a segment of an existing business, other forms of verification acceptable to SBA may be used in lieu of the Form 4506-T (e.g., Sales tax payment records)." For a business acquisition project, the seller must provide: 1. Historical tax returns for the 2 most recent years 2. Interim profit & loss statement 3. Signed 4506C form or 8821 Form (CDC will verify the IRS tax transcripts) Only when the seller s tax returns are consolidated with the seller s other businesses, then collection of the seller s tax returns can be waived. Instead of tax returns, the seller must provide: Accountant prepared profit & loss statements for the last 2 most recent years and interim period Sales tax receipts for the last 2 most recent years and interim period
New Business Definition Change Example Company E 2023 - Loan application for the purchase of real estate as part of a business acquisition of a food manufacturing company. - Business acquisition was being financed with a companion 7(a) loan from the Third Party Lender - CDC attempted to argue the subject acquisition is not a new business due to the existing affiliate (owned and operated by the applicants for many years) also being in the food industry as a retail meat market - SBA did not accept the not a new business argument because a retail meat market operates under NAICS code 424470 (Meat and Meat Product Merchant Wholesalers), whereas the OC business being acquired from the seller operates under NAICS code 311999 (All Other Miscellaneous Food Manufacturing). - SBA required the borrower to inject an additional 5% towards the 504 project since the OC was determined to be a New Business.
Loan Assumption Company F (original loan given to a new business) 2021 Purchase Price Total Project Cost $1,175,000 $1,198,000 (includes fees financed) LTV 85% Escrow Closing Date 7/2021 Original TPL Loan Amount $600,000 (50%) Original Gross Debenture Amount $424,000 (34% net debenture) TPL Rate 4.75% Fixed SBA Full Term Rate 3.157%
Loan Assumption Assumptions & Subordination Company G 2023 SBA allows for a one-time assumption. Future assumptions after that may not be considered. Purchase Price $1,140,000 Appraisal $1,140,000 Eliminates any of the upfront fees usually associated with an SBA loan such as any applicable SBA Guaranty Fee, CDC closing costs for new set of loan documents, and the CSA underwriter fee for funding the debenture loan. Escrow Closing Date 8/2023 New TPL Loan Amount $587,305 (51% LTV) TPL Rate 8.71% (5yr. CMT + 4.75%) SBA Full Term Rate 3.157% Our servicing and processing department with the BDO overseeing it internally reviewed the new Guarantors and Operating Company to ensure they were eligible and qualified for the loan. Up to 1% of the outstanding principal balance, paid by either the seller or buyer (or combined) SBA Assumption Fee paid to CDC Full release of original Borrower, Operating Company, Individual Guarantors (requires SBA s approval) Release Documents were executed for both loans and the use of the Third-Party Lender s escrow company to record all documents streamlined the process. SBA s new Guarantors became new Operating Company, Guarantor Affiliate, and 2 Individual Guarantors. New Borrower has title to property. New Guarantors The SBA s servicing center approved the Assumption and Subordination within a 10- business day turnaround time. The LTV was not stronger in the assumption, and did not meet 90%, but the new guarantors have a stronger personal net worth, and stronger business financials. This was a strong candidate for an assumption and made sense to SBA.
Contact Information Carly Whitney Senior Vice President (213) 369-9947 Carly@BFCfunding.com
