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Session #T17:Navigating the Credit Jungle – Opportunities in HUD and SBA
Financing
May 3, 2011
9:15 – 10:45am
Mary Louisa L’Hommedieu, Partner, Dodd, L’Hommedieu & McGrievy Mark P. McGrievy, Partner, Dodd, L’Hommedieu & McGrievy
Tim Dixon, Head of SBA Financing, Citizens BankSusana Araoz, Chief Underwriter, Housing & Health Care Finance
CONTACT INFORMATION
Mary Louisa L’Hommedieu
Partner
Dodd, L’Hommedieu & McGrievy, LLC
25 South Franklin Street
Chagrin Falls, Ohio 44022
216-653-0002
Cell: 330-327-3853
CONTACT INFORMATION
Mark P. McGrievy
Partner
Dodd, L’Hommedieu & McGrievy, LLC
25 South Franklin Street
Chagrin Falls, Ohio 44022
216-653-0002
Cell: 216-952-0556
CONTACT INFORMATION
Susana Araoz
Senior Housing & Healthcare Specialist
Housing & Healthcare Finance
5404 Wisconsin Ave.
2nd Floor
Chevy Chase, MD 20815
301-634-6829
CONTACT INFORMATION
Timothy D. Dixon
Chief, SBA Division
Citizens Bank
4834 Richmond Rd.
Cleveland, Ohio 44128
Phone: 216-514-5431
Fax: [email protected]
OBJECTIVES
• Explain recent legal changes in HUD’s LEAN Program
•Evaluate the HUD LEAN Program using a specific case study
•Describe recent legal changes to SBA program through 2010 Jobs Bill
•Evaluate the use of SBA7a and Express Loans
•Describe the use and requirements for traditional lending
•Provide examples of financing available under each program
HUD Financing
Susana Araoz, Housing & Healthcare Fianance
Opportunities in HUD financing
Presented By:
Susana Araoz
FHA (“HUD”) Insured Financing • HUD insures mortgages underwritten and approved
by delegated lenders for the following property types
– Nursing Homes (Skilled and Intermediate Care)– Assisted Living– Board and Care– Alzheimer Facilities– Hospitals– Independent Living – Housing (Single and Multifamily)
Financing Purpose
• Acquisition• Refinance• Refinance existing HUD debt to lower
interest rate• Refinance existing debt with an
addition• Substantial rehabilitation• New construction
FHA Section 232/223(f) Lean
Refinance and Acquisition
Existing Facilities
No minimum/maximum loan amount
Generally 30-35 year term – Fully amortizing
Low Fixed rate
Flexible prepayment terms
Loan Terms: 80% of HUD-appraised value (85% for Non-Profit)
100% of the cost to refinance including repairs
80% of acquisition cost
Non-recourse
Fully Assumable
FHA Section 232 LeanNew Construction/Substantial Rehabilitation for
Healthcare Facilities
New Construction / Substantial Rehabilitation
No minimum/maximum loan amount
Generally 40-year term (plus construction or rehab term)
Low Fixed rate
Construction loan to Permanent all at once
Loan Terms: Assisted Living- 75% of LTV, 1.45 DSCR
Skilled Nursing- 80% LTV, 1.45 DSCR
Non-recourse
Fully Assumable
FHA Section 223(a)7 Refinance of existing HUD debt
Refinance of existing HUD debt
Take advantage of today’s lower interest rates
Streamlined process
No appraisal or environmental reports needed
PCNA required every 10 years or if extending the term
Loan Terms: Term extension- The lesser of initial term or 12
years
Outstanding principle balance of existing loan plus repairs and transaction costs
Non-recourse
Fully assumable
FHA Program Requirements
• Single Asset Mortgage
• Replacement Reserve
• Liability Insurance
• Monthly Escrow of Insurance, Tax & MIP
• Annual Inspections
• Annual Financial Audit
• Distributions Limited to Surplus Cash
• Escrows Required
HUD TimelineTimeline / Requirements • Third party reports
– Appraisal– Market Study– Engineering – Environmental
• Document collection & site visit – completed while 3rd party reports being completed
• Completion of underwriting and submission to HUD
• HUD Queue • HUD Review • HUD Closing
CASE STUDYTexas Nursing Home
Property Overview
Years built: 1968 and 1976
Total Beds: 199
Census: 83.8%
Appraised Value: $7,800,000
Loan Request: $6 MM
Existing Debt: $2.9 MM
Loan Analysis ($ in 000s)
Effective Gross Income (including vacancy): $7,840
Annual Operating Expenses: $6,431
Net Operating Income: $1,409
Add Management Fee 5%: $392
Adjusted Net Operating Income: $1,017
Capitalization Rate: 13% (per appraisal)
HUD VALUATION: $7,823
CASE STUDYTEXAS NURSING HOME
Loan Analysis
Term: 35 years
Rate: 4%
Mortgage Insurance: 0.50%
Maximum Loan Amounts
Based on Value (80%): $6,258
Based on DSCR (1.45x): $13,817
Based on Transaction Costs: $3,100 (includes 100% of existing debt)
Maximum Loan Amounts: $3,100
CASE STUDYTexas Nursing Home
Recent Legal Changes in HUD LEAN
DACA (Deposit Account Control Agreement for non-governmental receipts)
DAISA (Deposit Account Instructions Service Agreement for governmental receipts)
Accounts Receivable Financing – Inter-creditor Agreement
Master Lease
Pro’s & Con’s of FHA Financing
• Long-term financing• Low fixed interest
rates • Long amortization
period; no balloon; • Non-recourse• Fully Assumable• High Loan to Value
• Timing• Flexibility/Creativity• No cash out• New insurance requirements• Limits on Distributions• Audit Requirements• Inter-creditor agreement
needed with A/R financing
PRO’S CON’S
SBA Financing
Tim Dixon, Citizens Bank
NAVIGATING THE “CREDIT JUNGLE” OPPORTUNITES for SBA FINANCING
OHCA/OCAL/OCDD 2011 Annual ConventionMay 2011
Timothy D. DixonHead of Small Business Administration(W) [email protected]
22
Discussion Topics for Today…
• SBA Financing Programs– Standard7A– Express– 504
• USDA Highlights
23
SBA Financing Can Be an Excellent Tool to Navigate Today’s “Credit Jungle”
• Mitigate credit risk for the lender and “get the deal done”– Collateral shortfall– Industry risk– Start – Up situation (less than 2 years)– Erratic historical earnings
• While offering enhanced financing to the borrower– Less equity/lower down payments– Longer loan amortization– Longer note maturity/no balloons
24
SBA 7a – Program Features
25
SBA 7A Program
• Banks are generally the primary point of contact and partner with the SBA
• Preferred Lender Status provides a bank with delegated loan authority from the SBA
• Bank funds the loan and the SBA provides a guarantee
26
Maximum Loan Size
• Loan limit $5,000,000
– Aggregate guaranteed amount may not exceed $3,750,000 (=75% of $5MM)
27
Maximum Guarantees
• Standard 7(a)
– $150,000 or less – 85%
– Over $150,000 – 75%
28
Loan Maturity/Amortization
• Based on useful life of assets• Working capital: up to 10 years• Machinery/Equipment or Leaseholds:
generally 10 years, maximum of 25; not to exceed life of asset
• Land/building: up to 25 years, plus time to complete construction/renovation
29
• Base Rate (Prime or LIBOR+300)Plus ….
Loan Size Maturity < 7 years Maturity 7 years +
$50,000 + 2.25 2.75
$25,000 - $50,000
3.25 3.75
Up to $25,000 4.25 4.75
Maximum Interest Rates Allowed
30
SBA(One-Time)Guaranty Fee
• Guarantee fee paid by borrower – can be included in loan total• Lender may also charge an additional reasonable packaging fee - but cannot charge
points.
Loan Amount Fee on Guaranteed Portion
< $150,000 2.00%
$150,000-$700,000 3.00%
> $700,000 3.50%
> $1,000,000 (for the portion > $1,000,000 only) 3.75%
Term 12 months or less 0.25%
31
Prepayment Penalties
• Only applies to loans with 15 years or greater maturities
• Use declining balance method: 5% of prepaid amount in first year, 3% in second, 1% in third
32
Determining Eligibility – Do We Qualify?
• A for-profit operating (not passive) business, engaged in an eligible industry, located in the United States
• Small business under SBA size standards• Able to demonstrate a need for SBA financing
– “Credit Elsewhere” Test – “Personal Resources” Test
33
Ineligible Businesses Include…
• Non-profits (for profit subsidiaries may be eligible)
• Prior loss to the government• Passive owners of property• Principal(s) on probation or parole (all principals
ever arrested, charged or convicted must be cleared through the District Office – Form 912)
34
Long Term Care Eligibility
• Several tests are applied to long term care facilities to ensure they are operating entities rather than passive real estate type entities (e.g. apartments).
– Specific State licensing Or – Certain services included in base such as;
• 24 hour care• 2 meals per day• Laundry services
35
Eligible Passive Company
• An Eligible Passive Company (EPC) is generally formed to hold the fixed assets of an Operating Company (OC) – e.g. a real estate holding company
• EPCs are an exception to the regulations against Passive income
36
EPCs and OCs
• EPC lease must run only to OC• OC must comply with occupancy rules• Lease Term must be equal or greater
than the term of the loan;• Lease payments cannot exceed the EPC’s
loan payment• EPC and OC should be co-borrowers
37
“Small” Business Size Standard
• Size standard for Long Term Care varies between $7MM – 13.5MM in annual revenue.
• A NEW alternative size standard for 7(a) loans is also available on a temporary basis. – Tangible Net Worth less than $15 million, AND– Net Income (two-year average) less than $5.0 million
(excluding any carry-over losses)
• Affiliates in calculation – Affiliate is any related business entity of the borrower, or owned separately by any20%+ owner.
38
Credit Elsewhere Test
• The applicant must demonstrate a need for a guaranty on the loan
• Lender must determine– Applicant is unable to obtain the loan on
reasonable terms with SBA guaranty, AND– Some or all of the loan is not available from
• Resources of the applicant business OR• Personal resources of the business’
principals – Personal Resource Test
39
Factors that Demonstrate “Need”
• Need for longer amortization/maturity than lender policy permits
• Loan exceeds lender’s legal lending limit/policy• Lender liquidity depends on secondary market• Inadequate collateral under lender policy• Violates lender policy regarding loans to new businesses or in
applicant’s industry• Other factors related to credit that require guarantee
– To refinance debt already on reasonable terms
40
Personal Eligibility
• Each owner (20% or more) must be:– Of good character– Legally in the United States– Able to demonstrate need for credit
• To determine character– Credit reports– Form 912, Personal History Statement– Form 4506-T, IRS Verification of Financial
Information– No prior loss to the government
41
Personal Resources Test
• Individual owners with personal liquid resources in excess of SBA specified levels must inject those “excess liquid resources” into the applicant business to reduce the loan request
• Requirement applies to all 20%+ owners (if both spouses have ownership, only one exemption)
• “Liquid assets” – include principal + spouse + dependent children– Spouse must sign personal financial statement
42
Personal Resources Exemption
Total Financing Package Exemption(SBA + equity injection + other financing) greater of:$250,000 or less 2.0x or $100,000$250,001 - $500,000 1.5x or $500,000Over $500,000 1.0x or $750,000
“How much cash can I have before I have to chip in?”
43
Underwriting Considerations
• What are some basic underwriting considerations?
44
Credit Underwriting
• Lender must analyze each application in a commercially reasonable and prudent manner
• Cash flow is primary source of repayment (not liquidation of collateral)– Application must be declined if cash flow is inadequate
to provide reasonable assurance of timely repayment, regardless of collateral
45
Equity Requirements
“Skin in the game”
• Borrower equity is required • Rule of thumb: 10%-20% of total project cost is
recommended• Lenders required to verify injections prior to
disbursing loan proceeds
46
Collateral Requirements
• Loan must be fully secured at liquidation value to the extent that collateral is available, BUT
• The SBA will not decline a loan solely on the basis of insufficient collateral
• If business collateral at liquidation value is inadequate to secure loan, lender must take all available personal assets of principals
• Inventory and A/R are excluded from collateral valuation
47
Guarantees
• All owners of 20% or more are required to pledge a full, unlimited personal guaranty
• If a spouse owns 5% and the combined ownership of spouses totals 20%, both must fully guaranty
• Full or limited guaranties of other parties may be required if necessary for credit reasons
48
Collateral Supporting Personal Guarantee
• Personal residence may be taken as secondary collateral when:– Required by bank OR– Other collateral is weak and equity in residence
exceeds 25% of market value– In some States, liens on secondary collateral may
be limited to 150% of the equity in the collateral, rather than loan amount, where there are tax implications
49
Collateral Supporting Personal Guarantee
• Assignment of Life Insurance Policy– Required if lender determines viability of business is tied to
an individual AND– Required to cover collateral shortfalls
50
Use of Proceeds
• What can be financed under SBA 7a?
– Eligible Uses• Real Estate considerations• Refinancing• Change of ownership
51
Eligible Uses of Proceeds
• New starts• Business acquisitions• Expansions• Working capital• Land, buildings, equipment• Debt refinancing
52
Ineligible Uses of Proceeds
• Pay delinquent taxes or other funds held in trust (payment of delinquent income taxes may be permitted if the applicant has an approved payment arrangement with the IRS)
• Pay or refinance debt used for distributions to associates of the applicant
53
Real Estate Occupancy Requirements
• Purchase of existing building: applicant must occupy 51% of rentable property
• New construction: – 60% must be occupied by applicant immediately.
80% must be occupied within 10 years– 20% may be leased out “permanently”
• Loan to EPC: EPC must lease 100% to OC, and OC must comply with occupancy rules
54
Refinancing Existing Debt
Two Tests:
• Credit must not be available elsewhere on reasonable terms
• Refinancing must provide small business a substantial benefit
55
• Restructuring of revolving lines of credit – other lender not willing to renew line or better interest rate and/or term
• Business credit cards (business use must be certified)
• Long term debt structured with a demand note or balloon payment
• Debt that no longer meets borrower’s need
Debt Considered Unreasonable
56
• New debt improves cash flow by 10%
– For multiple notes, each DOES NOT have to be improved by 10%, but none may have a higher debt service after the refinancing
• Old debt’s interest exceeds SBA maximums
• Old debt is over collateralized
Provide a Substantial Benefit
57
Refinancing Same Lender Debt
• Must provide transcript for the last 36 months:– Explanation for any past due (over 30 days)
• Standard processing only – cannot use PLP authority
58
Refinancing Previous SBA Debt
• Refinance SBA debt from another institution – Contact existing lender to verify that they are unwilling to
modify the terms/conditions of the existing loan to meet your structure
– Document this conversation in the loan file (date, time, person with whom you spoke, summary of conversation, etc.)
• Refinance same-institution SBA debt– Only allowed if a secondary market investor will not agree
to modified terms– Standard processing only
59
Change of Ownership
• Applicant must purchase 100% of business, OR existing owner(s) must purchase the stock of a selling owner resulting in 100% ownership by purchaser(s)
• Promote development of or preserve the business - must be in the best interest of the business (not buyer or seller)
60
SBA Express Program
• Currently limited to $1,000M• 50% SBA guarantee• Can include revolving credit facilities• More flexible underwriting than 7a – based
on PLP bank credit standards
61
SBA 504 Program
62
SBA 504 Program
• Banks typically are the primary point of contact as they will provide the 50% of the total financing package as well as interim financing for the SBA Debenture
• Work in partnership with a Community Development Corporation (CDC)
• Certified Development Companies (CDCs) are non-profit corporations certified and regulated by the SBA to package, process, close, and service 504 loans.
63
Purpose of 504 loan
Economic development program that provides the private business sector access to capital for real estate and equipment purchases with reasonable terms.
To fulfill economic stimulus objectives; job growth/retention, increase productivity, and community development.
64
Bank Benefits
Less risk with lower loan to value Ability to offer borrowers better terms than
conventional financing Low down payment Longer maturity Low fixed interest rates
No special certification necessary from SBA Qualify more businesses for financing CDC facilitates SBA loan CRA Credits
65
Borrower Benefits
Access to capital in tougher banking environment
Minimal capital requirementLow fixed rateLong term note and amortizationAssumable
66
504 Program Features
67
SBA 504 Loan limits
$5.0 million SBA loan amount if project meets one of the following:
Job creation or retention requirementCommunity Development GoalPublic Policy GoalLimit includes total SBA exposure
68
504 Structure Overview
Security Standard Financing New Business OR Both New AND
Structure Limited/Special Limited/Special
Purpose Property Purpose Property
Bank 1st Mortgage 50% 50% 50%
CDC/SBA 504 2nd Mortgage 40% 35% 30%
Borrower 10% 15% 20%
69
Standard Financing Structure
The 504 applicant will qualify for a 10% down payment if:
Operating company has been in business for more than 2 years (no change in ownership)
Multi-purpose property
70
New Business or Special Purpose
The 504 applicant will qualify for a 15% down payment if: The operating company is new or has been in business for
less than two years or there has been a significant change in ownership. OR
The property is considered a special purpose property, which includes;Hospitals, surgery centers, urgent care centers and other
health or medical facilities; Nursing homes, including assisted living facilities
71
New Business and Special Purpose – cont’d
The 504 applicant will qualify for a 20% down payment if:
The operating company is new or has been in business for less than two years or there has been a significant change in ownership. AND
The property is considered a special purpose property.
72
The Bank Loan - Terms
1st mortgage and/or 1st security interest on assets financed
10-year term on real estate – amortization negotiated with bank
7-year term on machinery and equipment – amortization negotiated with bank
Interest rate is up to the bank – may be fixed or floating
Loan fees negotiated between lender and borrower
73
The SBA Debenture - Terms
2nd mortgage and/or 2nd security interest on assets financed
20-year term and 20-year amortization on real estate
10-year term and 10-year amortization on machinery and equipment
Fixed Rate over the life of the loan
74
Borrowers Equity Injection
Sources Include;Personal CashBusiness CashBorrowed Funds
Line of CreditSeller Note (subordinated and matching term)Cash flow must support such debt
Equity in subject property
75
SBA 504 Typical Loan Fees
CDC Origination Fees:
CDC Processing Fee 1.5%Funding Fee 0.25%Investment Banks 0.40% Total Fees 2.15%
+
Closing Attorney $2,500
+Out-of-pocket expenses
All fees are added to the 504 and are financed.
Bank Origination Fees:
One-time .50% fee payable to SBA
Other fees negotiable
76
SBA 504 Debenture Interest Rate
Interest Rate:
Based on 10/20-year Treasury+ Spread= Debenture Rate
+ SBA Ongoing Fee (0.749%)+ CDC Servicing Fee (0.625%)+ Colson Servicing Fee (0.10%)
= Effective Rate (plus.294% for refinance)
Effective Rates as of March – 10 year 4.89% 20 year 5.90%
77
Effective SBA Debenture rates
78
Determining Eligibility
• Does my business qualify for a 504 loan?
79
Operating Business
• The operating company must be organized for profit.• Several tests applied to long term care facilities to ensure they
are operating entities versus passive real estate type entities (e.g. apartments).– Specific State licensing Or – Certain services included in base such as;
• 24 hour care• 2 meals per day• Laundry services
80
Size Eligibility
SBA 504: Average net income for past two years (after tax) less than
$5 million Net worth less than $15 million. Includes any affiliate company the owners have. Limits increase by 25% in labor surplus area.
SBA 7a: 7a size standards are based on operating company’s NAICS
code and are specific for each.
81
Eligible Uses
Purchase land and construction of new building Purchase existing building Leasehold improvements Renovating or expanding existing facility Purchase of machinery and equipment Soft costs and professional fees Refinancing of existing debt
82
Economic Impact
• Because 504 is designed to help small businesses expand and to promote economic development, the SBA and ODOD requires that projects financed by the program result in the creation or retention of jobs
• Jobs must be saved or created within two years of project completion
• Job Creation Requirement of 1 New Job for each $65,000 of SBA 504 funding
83
Ineligible Uses
End loan feesWorking capitalStart up costsFranchise feesIntangible assetsMortgage broker fees
84
Ownership eligibility
20% or more owners of either real estate holding company or operating company will be guarantors.
Each spouse owning 5% or more must be guarantors when the combined ownership interest of both spouses is 20%.
If third party lender takes additional guarantors SBA will follow third party lender requirements.
Personal liquidity test applies to all individuals who own 20% or more of real estate holding company or operating company.
Not required to be a U.S. Citizen
85
Collateral Requirements
Second mortgage on subject property. If third party lender takes additional collateral,
SBA will follow third party lender requirements.If additional collateral is commercial property,
environmental work is required. Appraisal is on a case-by-case basis.
Corporate guarantee of operating company.
86
Occupancy Requirements
Borrowers can lease space, however, there are occupancy requirements.
Existing facility:Borrower is required to occupy at least 51%
of total square footageNew construction:
Borrower is required to occupy at least 60% of total square footage with the intent of occupying 80% in the future
87
Standard Debt Refinancing Provisions
Debt refinanced may not exceed 50% of expansion costs
“Expansion” is any project that includes acquisition, construction or improvement of land, building or equipment
Real estate holding company and operating company must be the same for refinanced debt and expansion debt
88
Standard Debt Refinancing Provisions
Eligible business are required to fit under the following guidelines:
Existing debt is collateralized by fixed assetsExisting debt was incurred for the benefit of the
small businessProvides a substantial benefit to the borrower when
prepayment penalties, financing fees, and other financing costs are taken into account (at least a 10% savings).
89
Standard Debt Refinancing Provisions
The borrower has been current on all payments of existing debt for one year prior to the date of SBA approval for refinancing.
Refinanced debt may not be owed to an associated business, and SBIC, or a creditor in a position to sustain a loss
Original use of debt was for acquiring eligible 504 assets
90
Standard Debt Refinancing Provisions
When only a portion of loan was used for eligible purposes, that portion of loan is eligible for refinance
May be at different locationsBoth existing 504 loans (SBA portion) and
7(a) loans may be eligible for refinancing under certain conditions
91
Special Debt Refinancing Program
92
Special Refinance Program
On September 27, 2010, the SBA Jobs Act of 2010 was signed into law
All loans must be approved by September 27, 2012.
All loans must be funded by the sale of the debenture within six months of approval. Best practice is to start appraisal and environmental early in process.
93
Special Refinance Program
There will be an increase of 0.294% to the existing ongoing guarantee fees, which is reflected in the effective fixed interest rate
Ongoing guarantee fee will be reviewed again for the next fiscal year (begins October 1)
Funding for the refinancing project comes from three sources:Third Party Lender – not less than 50% SBA 504 – not more than 40%Borrower – not less than 10%
94
Special Refinance Program Eligibility
For debt refinancing only, not for expansion or purchase of real estate or other fixed asset
504 loan proceeds to be used to refinance qualified debt and other eligible costs permitted for 504 loans
Substantially all (85% or more) of proceeds of loan being refinanced must have been used for 504 eligible purposes
Must have been current for past 12 months with no payment being deferred or past due for more than 30 days
95
Special Debt Refinance Program Eligibility-cont.
Debt must have been incurred at least two years ago. Land contracts are eligible.
Small business concern must have been in business for two years.
Debt may be refinanced even if it does not meet job creation or other economic development objectives.
In such a case, 504 loan size may not exceed the product of multiplying number of FTEs (40-hour work week) of borrower by $65,000
96
Special Debt Refinance Program Eligibility-cont.
If the amount of refinance is not sufficient to repay the entire outstanding debt, third party lender must disclose how the balance of the debt will be handled. For example:Accept payment from borrower for all or part of
deficiency.Accept a new note for the balance which will be
subordinate to the liens of the third party lender and SBA. Notes should contain a three-year stand-by agreement.
Forgive all or part of the deficiency.
97
Special Debt Refinance Program Eligibility-cont.
Third party loan and 504 loan combined may not be more than 90% of the FMV of fixed asset securing the loan.
Combined loan may not exceed the outstanding principal balance of the debt being refinanced.
Borrower’s 10% contribution may be cash, equity in the eligible fixed asset, or equity in any other fixed assets.
An appraisal of FMV of all assets used as collateral is required, and must be dated within 6 months of application.
Borrower, Lender, and CDC must certify the debt is eligible for refinancing.
98
Special Debt Refinancing Program - Debt Structure and Lien Position
Structure remains 50% bank financing, and at least a 10% borrower contribution.
The transcript of account for entire period of loan must be provided when refinancing same bank debt.
Third party loan cannot be sold on the secondary market as part of a pool of guaranteed loans.
Third party lender and SBA must be in first/second lien. Any other lien must be junior in priority to these.
SBA and third party lender may be in junior liens if other fixed assets are offered as collateral.
99
Special Debt Refinancing Program - Restrictions
No refinancing of loans with an existing federal guaranty (i.e. 7(a) loans or USDA loans).
No refinancing of loans which are already part of an existing 504 project.
No refinancing of debt if it is to an Associate of the borrower or a SBIC or New Market Ventures Capital Companies.
No refinancing where the creditor on the debt to be refinanced is in a position to sustain a loss causing a shift to SBA or all or a portion of a potential loss from an existing debt.
100
USDA
101
USDA Program Features
• Rural Development Business & Industry Guaranteed Loan Program
• Bank provides financing and USDA provides a guarantee
102
Eligibility
• Business must be located in a rural area
• Population of 50,000 or less
• Web site to determine eligibility:
http://eligibility.sc.egov.usda.gov
103
ELIGIBLE BORROWERS
• Cooperative, Corporation, Partnership, Individual, Tribal Group or Public Body
• 51% owned by persons who are either U.S. Citizens or have been legally admitted for permanent residence
104
INELIGIBLE BORROWERS
• Churches, Charitable or Fraternal Organizations
• Lending, Investing or Insurance Companies
105
ELIGIBLE LOAN PURPOSES
• Existing or Start-up Businesses• Real Estate and Buildings• Machinery & Equipment• Term Working Capital• Refinancing (max. 49% existing exposure)• Nearly any business venture with a few
exceptions
106
INELIGIBLE LOAN PURPOSES
• Agricultural Production• Golf Courses• Gambling • Racetracks• Housing• Equity Distributions to Existing Owners
(if maintaining any ownership)• Line of Credit Loans• Loans with Balloon Payments
107
RATES & TERMS
• Real Estate 30 years• Building or Construction 30 years• Machinery & Equipment 15 years• Working Capital 7 years• Debt Refinancing 30 years
• Interest Rate is Negotiated between Business & Lender – (can be Fixed or Variable, adjusting not more than quarterly)
108
PERCENTAGE OF GUARANTEE & FEES
• To $5 Million…..……………………up to 80%• $5 - $10 Million….………………….up to 70%• Over $10 Million……………………up to 60%
• Fee is 2% of Guarantee Amount($500,000 x 80% x 2% = $8,000) plus annual recurring fee – currently 1/4 %
109
CREDIT REQUIREMENTS COLLATERAL
• 1 to 1 coverage on a discounted basis• Any reasonable, sound loan-to-value discount policy (consistent
with non-guarantee loans) Generally:Real Estate/Buildings 75% of mkt valueM&E 60% of mkt valueAR & Inventory 60% of book value
Required: Limited, Personal Guarantees of anyone with 20% or more ownership in the business
110
CREDIT REQUIREMENTS - EQUITY
• Existing Business 10%• New Business/New Ownership 20%
• Tangible Balance Sheet Equity, as a % of Total Assets, on a Book Basis, according to GAAPMust remove intangibles, subordinated debt and appraisal surplus from both assets and equity
111
CREDIT REQUIREMENTS (OTHER)
• Adequate Cash Flow & Debt Service Ability
• Management Ability
• Acceptable Personal & Business Credit History
112
LOAN PROCESS
• Pre-application– Lender’s Credit Analysis
Make sure it includes source & use of funds and a post closing pro-forma balance sheet
– Financial Statements• (5 to 10 Business Days)
• Can call anytime to get our feel of the proposal before submitting any information.
113
APPLICATION
• Field Visit• Application for Guarantee• Business Plan or Feasibility Study• Credit Reports• Proposed Business Loan Agreement • Environmental Assessment/SHPO• Appraisal
– (5 – 15 Business Days)
114
LOAN PROCESS
• Agency Credit Committee Approval• Conditional Commitment is Issued
6 Day Delay• After Loan is Closed, submit Closing
Docs., Appraisal, Balance Sheet & Check for Fee
• Loan Note Guarantee is Issued After the Project is Complete
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Navigating The “Credit Jungle” Summary
• While each program has different features, they all provide a form of credit enhancement that can make the difference in getting a deal done
• Each program provides additional benefits to the borrower, which offsets the incremental up-front expense.
• The key is to partner with a bank that is familiar with these programs and can help you navigate today’s “credit jungle”
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Housing & Healthcare FinanceSenior Housing & Healthcare Specialist
Housing & Healthcare Finance, LLCwww.hhcfinance.com
Susana Araoz Elan Magence5404 Wisconsin Ave. 8320 Skokie Blvd2nd Floor Skokie, IL 60077Chevy Chase, MD 20815 847-933-9464301-634-6829 847-679-0088 (fax)301-841-2304 (fax)
[email protected]@hhcfinance.com
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