Lender Summit August 19, 2011 The Small Business Administration (SBA) 504 Loan

Major differentiations between 7a and 504 loans:  Delivered by certified development companies (CDC). All shapes and sizes of CDC’s. “Licensed” by SBA to deliver the 504 product.  Partnership loan – always involves a CDC, a lender, and a business.  Niche product – capital equipment and owner-occupied real estate only. No working capital.  SBA relationship with the CDC, not the lender - no paperwork/on-going SBA monitoring for the lender.  Primarily used by existing businesses.

1. Traditional 504 Loan - provides monies for expansion/purchases 2. Partial 504 refinancing product – couples an expansion with a refinancing of existing debt 3. Total 504 refinancing product – temporary product – expires 9/30/12. Provides only refinancing of existing debt. No expansion money or cash out available.

 Expansions  10% down payment most attractive feature  Permanent financing  Must demonstrate community impact (jobs or 1 of 12 other impacts)  Long term fixed rate for 10 or 20 years  Junior lien position behind participating lender (~50% LTV for lender)

Uses Land$200,000 New Building$750,000 Soft Costs/ Interim interest$ 50,000 Total$1,000,000 Sources Bank/Lender$500,000 (50%) CDC 504 Loan$400,000 (40%) Equity$100,000 (10%) Total$1,000,000

 SBA project costs can include a refinancing component not to exceed 50% of the cost of an expansion  Works very well for borrowers expanding an existing building with debt  Equity for borrower can be inferred – 100% financing might be available  Must demonstrate 10% savings to business  Subordinating to existing debt in excess 50% threshold can be considered outside the SBA project costs

Uses New Construction Costs$ 900,000 Debt refinance (50% of new costs)$ 450,000 Total SBA project costs:$1,350,00 Debt in excess of 50%$ 50,000 Sources Bank/Lender$ 725,000 (50% of new + debt in excess of 50%) CDC 504 Loan$ 540,000 (40% of new) Equity $ 135,000 (10% of new) Total:$1,400,000 (SBA project + debt in excess of 50%)

 Not the traditional 50%/40%/10% structure  Project structure governed by recent appraisal  Lender always does 50% of appraised value Step One:Determine Value by New Appraisal Step Two:Structure:  Lender funds 50% of appraisal  Borrower injects all equity (appraisal less debt)  CDC does remainder

Appraisal of building $1,000,000 Debt on Building$ 800,000 Bank (always 50%)$ 500,000 Borrower (appraisal less debt)$ 200,000 CDC 504$ 300,000

 Too much equity – not eligible or feasible for 504 refinance product  Too little equity or upside down – borrower has to inject cash or pledge other collateral  Documentation challenging - must submit entire genealogy of the loan (since origination) – not bad if originated at same bank that is refinancing  Temporary Product – expires 9/30/12  Rate on refinancing product ~ 30 basis points higher than traditional product – SBA expects higher default of this tranche of SBA loans  Borrower historically must been current on debt service payments

 Partial Refinancing (permanent) and Total Refinancing (expires 9/30/12)  All electronic processing - doesn’t directly affect the lenders or borrowers, but it does reduce costs of product (shipping & handling) and expedites processes  Expanded the definition of small businesses - $15MM NW & $5MM PAT  Maximum loan increased from $2MM to $5MM  Waived most SBA fees for parts of 2009 & 2010

David C. Long SPOT