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

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

3. SBA’s “Other” Loan – The 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.

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

5. Traditional 504 loan • 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)

6. Sample Structure:Traditional 504 Loan 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

7. Partial Refinance 504 Product • 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

8. Sample Structure:Partial Refinance 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%)

9. Total Refinancing Product • 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

10. Sample Structure:Total Refinancing 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

11. Key Issues: • 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

12. Major Changes in the 504 Product Last 24 months: • 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

14. Q & A: David C. Long 1-877-504-SPOT david@hbcloans.com