The SBA 504 Loan Program

1. The SBA 504 Loan Program www.seedcorp.com Revised by SEED Corp. 6/13

2. What is the SBA 504 Loan Program? • It is the Small Business Administration’s “economic development financing program.” • Loans are provided to expanding, small businesses to aid in job creation. • SBA loans are guaranteed by the Federal Government.

3. The Role of SEED Corporation • The SBA 504 Program is administered through SBA Certified Development Companies (CDC’s) like SEED Corporation. • SEED underwrites, packages, closes and services SBA 504 loans.

4. Use of Funds Fixed-Asset Acquisition or Expansion: • Purchase land & construction of new buildings. • Purchase and/or renovate existing buildings. • Construct an addition to an existing building. • Refinance existing eligible fixed asset debt up to 50% of new expansion project. • Acquire/install machinery & equipment. • Construct or remodel buildings on leased land. • Soft costs related to the project (appraisal, environmental assessment, interim interest, and professional fees).

5. Use of Funds (Cont.) • Ineligible use of funds: • Debt refinancing(if there are no expansion funds) • Purchase of trucks, autos and airplanes • Working Capital • Franchise fees • Management fees and advertising • Incorporation / organization costs Contact SEED at (508) 822-1020 for Loan Structure!

6. Not Eligible for 504 Funding • Non Profits • Lending institutions • Life Insurance companies • Private clubs • Speculative investment • Non-owner occupied building • Gambling concerns • Businesses engaged in promoting religion • Cooperatives (exception for some producer coops)

7. Not Eligible for 504 Funding (Cont.) • Political or lobbying services. • Businesses located in foreign country or owned by a non-resident alien. • Businesses selling through pyramid plans. • Businesses engaged in sales or services of a prurient sexual nature. • Businesses with prior loss to the government. • Relocation of a small business causing a net deduction of one third or more of its workforce or a substantial increase in area unemployment.

8. Benefits to the Borrower • Up to 90% financing for a fixed asset project. • Long-term, fixed rate funds … enhancing cash flow for business. • The SEED effective rate as of 5/13 is 4.14% on a 20-yr debenture, and 3.18% on a 10-yr debenture. • Ability to include soft costs, equipment and furniture and fixtures. . .enabling business to minimize out of pocket expenses and preserve cash. • Lower down payment conserves working capital.

9. Benefits to the Broker • Ability to identify financing product that allows buyer to acquire property with as little as a 10% injection. This means the ability to MAKE THE SALE in a greater number of cases! • Incentive payment for referral to SEED – As a thank you for the referral of any small business that funds on an SBA 504 loan for a commercial property which you represent, SEED will provide an incentive of .25% of the SBA 504 loan amount up to $1,500.

10. Benefits to the Bank • Bank’s maximum loan-to-value is typically 50%, minimizing risk and improving liquidity. • Ability to finance projects with as little as 10% injection. • Program allows reliance on financial projections for startups and businesses with inadequate historic cash flow. • The bank’s first mortgage can be sold in the secondary market for a premium. • SEED is responsible for all of the paperwork!

11. Selling the 504 Option If the answer to any of the following questions is yes, then give the customer an introduction to SBA 504. • Is working capital important to the success of the business? • Is a long-term fixed rate important for cash flow? • Is a low down payment important? • Does the business want protection in the event of a devaluation of real estate?

12. What’s needed for SEED to approve a 504 request? • Purchase & sales agreement for project property and cost estimate for construction/renovation projects. • Three years of tax returns and financial statements for the business. • Information on the borrower’s existing debt.

13. What’s needed for SEED to approve a 504 request? • Current personal financial statement and 2 years of personal tax returns for each principal of the business (20% or more ownership). • Property appraisal and environmental assessment can be submitted to SEED after approval. No Application Form is required!

14. Project Size Requirements • Minimum Amount of 504 Loan: $25,000* There is no maximum limit to project size. Maximum Amount of 504 Loan: Up to $5 million for most businesses Up to $5.5 million for manufacturers and projects generating renewable energy or fuels. * SEED calculates costs and benefits for 504 projects under $300,000 and may use other program funds.

15. Typical Structure for Established Business SBA/SEED 504 Loan - 40% Bank - 50% Owner’s Equity – 10%

16. Structure of a Typical $1 Million Project Loan % of Entity Amount Project Security Lender $500,000 50% 1st Mortgage SBA / SEED 504 $400,000 * 40% 2nd Mortgage Borrower $100,000 10%** TOTAL: $1,000,000 100% *Total Debenture: $411,000 ($400 back to client) (Up front fees include 2.65% on $400,000) **Projects that involve a new business and/or special purpose buildingwill require additional 5-10% from the borrower.

17. Fees Charged by SEED Financed as part of 504 loan – 2.65% of net debenture CDC Processing Fee (SEED): 1.50% Underwriting Fee: 0.40% Covers expense of pooling & underwriting 504debenture – paid directly to Merrill Lynch. Funding Fee:0.25% Paid to Central Servicing Agent (Wells Fargo). SBA Guaranty Fee: 0.50% Total: 2.65%

18. Effective Rate Rate the borrower actually pays Note rate (as of 5/13 Sale): 2.107%Plus Fees: Annual Central Servicing Agent Fee 0.100% CDC Servicing Fee (SEED .875 + SBA .125) 1.000% SBA Fee 0.937% Total Fees 2.037% SEED’s Effective Rate (As of 5/13) 4.144% SBA Required Servicing Fee - This fee can go up to 1.5%. CDC’s Servicing Fees vary and impact the client’s effective rate!

19. Eligible Project Costs: Land $ 200,000 Construction 600,000 Contingency (10%) 60,000 Site Preparation 10,000 Machinery/Equipment 50,000 Furniture/Fixtures 20,000 Soft Costs ~ Permits 2,500 Architect/Engineer 25,000 Appraisal 4,000 Environmental Report 2,500 Title Insurance 1,000 Interim Interest & Fee 25,000 TOTAL $1,000,000 50% Bank $500,000 40% SEED $400,000 10% Owner $100,000 100% $1,000,000

20. Typical Structure for a Special Purpose Building OR Start-Up SBA / SEED 504 Loan - 35% Bank - 50% Owner’s Equity – 15%

21. Typical Structure for Start-Up Business AND Special Purpose Building SBA / SEED504 Loan - 30% Bank - 50% Owner’s Equity – 20%

22. Program Requirements Occupancy • Existing Building: Business must occupy at least 51%. - may lease out up to 49% • Newly Constructed Building: - Business must initially occupy at least 60%. - Must occupy up to 80% within 10 years.

23. Guarantees • Required for any principal with 20% ownership or more in Operating Company (OC) or Eligible Passive Company (EPC).

24. Ownership of Building • By the Operating Company (OC). • By an Eligible Passive Company (EPC) • Individuals • New corporation • Partnership • Limited liability corporation • Trust Ownership need not be identical

25. Prepayment First Half of 20 year Debenture

26. Job Requirements Provide one job for every $65,000 funded (SBA 504 Portion) Exceptions: • Manufacturing businesses provide one job for every $100,000 funded (SBA 504 portion). • Projects that meet any of the SBA Public Policy Goals or Community Development Goals.

27. Public Policy Goals Not Required to Create one job for each $65,000 • Revitalizing a business district of a community (a written revitalization/redevelopment plan). • Expanding exports. • Expanding minority-owned, woman-owned or veteran-owned businesses. • Aiding rural development. • Energy-consumption reduction of at least 10% • or sustainable design or equipment and process • upgrades.

28. Public Policy Goals (Cont.) Not Required to Create one job for each $65,000 • Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports). • Modernizing or upgrading facilities to meet health, safety, and environmental requirements. • Assisting businesses in, or moving to, areas affected by Federal budget reductions (base closings within • 10 years).

29. Community Development Goals Not Required to Create one job for each $65,000 • Improving, diversifying or stabilizing the economy of the locality. • Stimulating other business development. • Bringing new income into the community. • Assisting manufacturing firms. • Assisting businesses in Labor Surplus Areas as defined by the Department of Labor.

30. Appraisals • When more than $100,000 of 504 loan proceeds are • used for real estate transactions. • All appraisals must be addressed to both the Bank and the U.S. SBA and be consistent with Uniform Standards of Professional Appraisal Practice (USPAP). • Be performed by a state certified or state licensed appraiser and for all loans over $1,000,000, the appraiser must be state certified.

31. Environmental Reports • Depending on Risk Level of the Property: • Environmental Questionnaire (504 loan $150K or less and not environmentally sensitive) • Database / Records Search with Opinion • Transaction Screen Analysis (TSA) • Phase I • Phase II (with “no further action” classification)

32. The 504 “Process” • Borrower or the bank submits a loan package to SEED. • SEED conducts preliminary review and works with bank and client. • The loan request is presented to SEED’s Loan Review Committee (meeting or e-mail). • A commitment letter is sent to the borrower with a copy to participating bank. • Loan is packaged and forwarded to SBA Central Office in Sacramento, California for issuance of the Authorization.

33. The 504 “Process” • SEED is an Abridged Submission Method (ASM) • lender, and submits required forms to SBA plus: • Purchase & Sale Agreement • Construction Cost Estimates • Bank Commitment Letter • SBA approves “ASM” SBA 504 loans within 3 days assuming all eligibility requirements are met, and the paper work has been filled out properly. • Potential process delays: Franchise reviews; 912 criminal clearances; INS (Immigration) confirmations and gasoline jobber agreement reviews.

34. The 504 “Process” • Bank closes on permanent loan and bridge loan. • SEED/SBA payoff the bank’s bridge loan in 90 days on turnkey projects or after the project is completed (construction & renovation projects). • SBA Authorization (commitment) is valid for four years (48 months).

35. Simultaneous SBA 504 Closing with Bank Closing • Project is turnkey – does not involve construction or setting up of heavy machinery and equipment. • Bank and SBA 504 documents are signed at the same time to simplify process for bank and client. • A follow up list of items may be needed prior to funding and bank reimbursement.

36. Events that Can Delay Funding Process • Changes in project costs. • Lower than expected appraisals. • Incomplete or negative environmental investigations. • Changes in Borrower’s organizational structure. • Adverse financial change in the operating company. • Lawsuit, divorce or other legal issues. • Certificate of Occupancy.

37. Project Profile: 10% Down Pmt (Standard) Personnel Company – Acquisition of Existing Building Purchase of Land & Building $925,000 Improvements 148,000 Soft Costs 27,000 $1,100,000 Bank (50%) $550,000 SBA/SEED 504 (40%) $440,000 Client (10%) $110,000 • Client has been in business over two years, and is purchasing a 10,000 sq ft multi-purpose building for expansion (will lease 40%). • Collateral Coverage is based on 90% Loan to Value (appraised on “as completed” basis).

38. Project Profile: 15% Down Pmt (New Owner) Purchase of Existing Restaurant (New Owner) Considered new operation: Building Purchase Price $1,200,000 Bank (50%) 600,000 SBA/SEED 504 (35%) 420,000 Client (15%) 180,000 • Client has historical restaurant experience. • Collateral Coverage is 85% Loan to Value. • Building must appraise adequately or additional funds are considered goodwill and must be satisfied outside the 504 transaction.

39. Project Profile: 15% Down Pmt (Special Purpose) Acquisition of a Special Purpose Bldg – Gas Station Building Purchase Price $675,000 Bank (50%) 337,500 SBA/SEED 504 (35%) 236,250 Client (15%) 101,250 • Client is a three year operator of this leased location and wants to purchase this special purpose facility. • Collateral Coverage is 85% Loan to Value on a special-purpose building.

40. Project Profile: 20% Down Payment(Special Purpose and New Owner) Start-Up Hotel Purchase of Land $1,500,000 Building Construction 5,000,000 FF & E 950,000 Professional Fees 70,000 Contingencies/Interim Interest 380,000 $7,900,000 Bank (50%) 3,950,000 SBA/SEED 504 (30%) 2,370,000 Client (20%) 1,580,000 • Client is starting up a flag hotel. • Collateral Coverage is based on 80% Loan to Value on a start up, single purpose real estate project (includes furniture, fixtures & equipment).

41. Why YOU Should Consider a SBA/SEED 504 Loan? • Up to 90% financing for fixed asset project. • Lower down payment for client (as little as 10%). • SEED pays half of the .5% bank fee (0.25%). • Long-term, fixed rates for 10 or 20 years. • SEED provides quick & efficient turn around. • Broker Incentive Thank You for project referral. • SEED provides loans up to $200,000 at 5% fixed to replace the down payment. • SEED is responsible for all the paperwork. Call (508) 822-1020 or Visit www.seedcorp.com