INTRODUCTION

In May 1982, the Coastal Area District Development Authority (CADDA) became a Certified Development Company (CDC), administering the Small Business Administration's (SBA) 503/504 Loan Program.  In late 2003, SBA designated the State of Georgia as CADDA's delivery area.  Regardless of where our small business borrower expands in Georgia, we can provide financing for fixed asset capital expenditures.

PURPOSE

The purpose of the program is to create and/or retain permanent jobs by providing fixed-asset financing to healthy small businesses expanding their facilities.  The program provides a reasonable fixed-interest rate (published monthly), long repayment term, and a low down payment to small businesses for the achievement of economic growth in the designated area.

ELIGIBILITY

Use of Loan Proceeds

Loan proceeds can be used for fixed assets only, with a useful life at least equal to the maturity of the debenture.  The following costs may be eligible uses.

Loan proceeds may not be used for the following expenditures or purpose:

Use of Fixed Assets

The borrower generally must be the user of fixed assets purchased from the loan proceeds.  However, an "eligible passive company" (EPC) may be eligible for debenture financing under certain conditions without regard for commonality of ownership.  Unless an affiliation exists, the EPC and the operating company (OC) must individually comply with the SBA standards for "small businesses."  The EPC lease to the OC must be for at least the term of the SBA loan's repayment terms.  Owners of both the EPC and OC must personally guaranty the loan. In addition, the lease payment must be assigned to secure the loan.

For buildings acquired and/or renovated, fifty-one percent (51%) must be occupied by the borrower (49% may be leased all the time), if the loan proceeds were not used to remodel or convert the space to be leased out.  However, if the funding is for new construction, the borrower may lease 20% of the rentable space permanently if initially, the borrower occupies 60% of the rentable space and will occupy at least 80% within ten (10) years.

Loan Amount

SBA's maximum debenture is $1,500,000, except for projects that meet a public policy goal and qualify for a maximum debenture of $2 million.  For manufacturing companies, he maximum debenture is $4 million. This limitation does not apply to the bank's loan amount.  Due to the complexity of the program, small loans of less than $200,000 should be submitted through the SBA guaranty program.

Type of Business

- Eligible businesses include most operating for-profit businesses.

-Also, financial assistance may be provided to eligible passive entities who lease eligible

 project assets to an eligible operating business.

-Ineligible businesses include non-profit businesses and businesses that are engaged in lending, real estate development, life insurance, gambling, restricting patronage, promoting religion, and businesses located in a foreign country, or owned by non-qualified aliens

Business Size Standards

· Tangible net worth of a business, including affiliates, may not exceed $7million.

·  Operating profit after taxes, including affiliates, may not exceed $2.5 million over the past two complete fiscal years.

or

· Manufacturing businesses must employ less than 500 persons unless otherwise specified in the Standard Industrial Classification (SIC) code.

· Wholesale businesses are limited to 100 employees.

· Retail and service businesses may not have gross annual sales that exceed $5 million unless otherwise specified in the SIC code.

· Construction businesses may not have gross annual sales that exceed $11.5 million unless otherwise specified in the SIC code.

Job Creation

One permanent job must be created or retained per $50,000 of debenture funds.  If fewer jobs are created/retained, the project must demonstrate a high positive economic impact acceptable to the SBA as pertains to certain documented community projects and as applicable to certain national objectives.

PERSONAL RESOURCES

An owner of 20% or more of the applicant for SBA assistance may be required to inject personal resources (liquid assets) in excess of $100,000 for funding the project, depending on the total financing package. "Liquid assets" include cash, bank accounts, CD's, stock and bonds.  The amount of liquid assets that an individual may retain without being required to inject as equity to reduce the loan amount is as follows:

· Total Loan:  0-$250,000; 2 times the Total Financing Package or $100,000, whichever is greater

· Total Loan:  $250,001-$500,000; 1-1/2 times the Total Financing Package or $500,000, whichever is greater

· Total Loan:  Above $500,000; 1 times the Total Financing Package or $750,000, whichever is greater

Funds in excess of the limits must be used to reduce the SBA portion.

CREDIT ELSEWHERE

The lender must certify that the applicant could not obtain credit on reasonable terms and conditions from non-federal sources without SBA assistance.

COMMUNITY PROPERTY

Eligibility of a Small Business Concern is determined without regard to any ownership interest of a spouse arising solely because of community property laws for purposes of determining marital interest. 

LOAN PROGRAM PROCEDURES

APPRAISAL

An appraisal prepared by a state licensed or certified appraiser is required prior to disbursement of the interim loan for all real estate financing exceeding $250,000.  If the project is less than $1,000,000, an appraisal does not have to be included with the application package, but must be available prior to initial disbursement of the interim loan.  When the real estate transaction is more than $1,000,000, or the estimate value of the real estate is more than $1,000,000, a complete appraisal is required at the time of application.

APPROVAL

Upon approval of the application by the CADDA Board of Directors and the Small Business Administration, a written commitment (Authorization for Debenture Guaranty) for permanent financing is issued.

Interim or Construction Financing

After execution of the "Authorization for Debenture Guaranty", an interim loan is made from the participating lender.  The amount of the interim loan includes both the bank and the SBA portions (excluding SBA fees). 

Verification and Certification

CADDA is required to review the paid invoices, cancelled checks, loan advances, and lien waivers to verify eligible costs, adequate cash or equity injection, and full payment of all project costs.

Closing

The permanent loan closing of the debenture portion is scheduled by the CADDA closing attorney, who is approved and certified by SBA, after CADDA has verified and certified the project costs.  The loan documents are executed by the borrower and forwarded to SBA for their review and approval before the sale of the debenture. This method of closing is referred to as a "dry closing."

Funding

The sale generates funds for the debenture portion, which are wired directly to the participating bank reducing the bank's interim loan.  Twenty-year debentures are sold monthly, and ten-year debentures are sold every other month.  Funding usually takes place approximately 45 days after the "dry closing".

Servicing

CADDA services the debenture (SBA) portion of the loan. 

LOAN PROGRAM FEATURES

Benefits

Borrower Participating Bank

>Reasonable fixed interest rate              >Bank's customer base is increased

>Reduced cash/equity injection.            >Bank's CRA requirements are satisfied

>Longer repayment terms                     >Bank's credit risk is reduced

>Subordinated mortgage                       >Bank is allowed to determine its interest rate

  (attracts banker participation)

>Assumable SBA note

Paperwork

CADDA prepares SBA application for the borrower. The bank is required to provide only a commitment letter, an environmental statement, and appraisal on an "as-completed" basis for the application.

Interest Rate

The interest rate on the debenture portion is established at the time of the sale of the debenture and fixed for the life of the loan.  The interest rate on the bank's portion of the loan is determined by the bank.

Repayment Schedule

· SBA 504   - Ten or twenty years depending upon the life of the fixed asset(s). 

· Bank  - not less than ten years on a 20-year debenture.

        - not less than seven years on a 10-year debenture.

Method of Payment

The small business' bank account is debited on the first day of each month by ACH draft and remitted by transfer to Colson Services Corporation.

Bank's Lien Position

The bank receives a first mortgage and generally funds fifty percent (50%) of the total eligible project costs.  If the SBA portion attains the legal limitation based on the area served, the bank may be required to fund more than fifty percent (50%).

Loan Participation Structure

The loan structure and borrower's equity injection is determined by the building type and age of the business.  If the project is to construct a single-purpose building or a new business (operating less than two full calendar years), SBA funding is limited to 35% of the total eligible cost.  If the applicant is a new business and is constructing a single purpose building, SBA funding is limited to 30%.  SBA funding and the borrower's injection cannot exceed 50% of the total eligible costs. 

Examples of Funding for Eligible Costs Not Exceeding $2,000,000    

Example of Funding Sources in
Debenture Dollar Amounts:

**Ineligible project costs are the responsibility of the borrower.

Loan Transfer

The SBA loan may be assumed by another borrower provided the necessary SBA credit standards are satisfactory to both the participating bank and SBA.  This transaction is advantageous to both the seller and the buyer because it reduces legal costs, eliminates prepayment penalties, and transfers a reasonable fixed-interest rate.

LOAN PROGRAM REQUIREMENTS

Cash Flow

The company's adjusted cash flow must be adequate to service the entire debt.

Credit History

The company and principals must have satisfactory history of meeting debt obligations in a timely manner.

Management

T he company must have capable management acceptable to SBA.

Location

The business may be located in any county in the State of Georgia.  CADDA may be able to finance projects in contiguous states with the approval of that state's SBA District Office.

Equity/Cash Injection

The borrower must provide a minimum equity injection of ten (10%), fifteen (15%), or twenty (20%) percent of the total eligible project costs in cash or project assets, depending on the age of the business and the type of building structure. 

Injection by Small Business Concern

            If the small business concern has been in operation for a period of two (2) years or less, the concern (or its owners, stockholders, or affiliates) receiving assistance, must provide at least fifteen percent (15%) of the eligible project costs.  If the equity injection of 15% is required, the SBA 504 portion shall be limited to 35% of the total eligible costs.

Single Purpose Building or Structure

            If the project being financed involves a limited or single-purpose building or structure, the concern (or its owners, stockholders, or affiliates) receiving assistance, must provide at least fifteen percent (15%) of the eligible project costs.  If the equity injection of 15% is required, the SBA 504 portion shall be limited to 35% of the total eligible costs.

            A "limited or single purpose building or structure" as defined by the Dictionary of Real Estate Appraisers, which is published by the Appraisal Institute, is as follows:  "Special-Purpose property is a limited market property with a unique physical design, special construction materials, or a layout that restricts its utility to the use for which it was built; also called special designed property."

            Examples of special purpose properties include gas stations, motels, car washes, marinas, bowling alleys, or any other facility that would have limited markets or would require extraordinary costs to make the market.

Special Purpose Building & New Business Concern

            When an applicant business is a new business as previously defined and the proceeds will be used to construct or acquire a special purpose property, the small business concern (or its owners, stockholders, or affiliates) receiving assistance, must provide at least twenty percent (20%) of the eligible project costs.  If the equity injection of 20% is required, the SBA 504 portion shall be limited to 30% of the total eligible costs.

INELIGIBLE PROJECT COSTS . 

Funding of ineligible costs, as determined by SBA, are the responsibility of the borrower.

Previous Expenditures

Costs incurred more than nine (9) months prior to written application to SBA cannot be included as eligible costs under this program.

Collateral

· Generally, the bank will be secured by a first mortgage.

· SBA's debenture will be subordinate (second lien) to the bank's priority mortgage.

· Personal guarantee of those persons or entities having 20% or more ownership; however, guarantees of parties having less than 20% ownership may be required, at the discretion of SBA, depending on the ownership structure.

· Secondary collateral may be required if the applicant is a "new" business without proven management and existing cash flow is sufficient to service the new and existing debt.

· Real property securing the debt must be appraised by a qualified appraiser (State certified) using the cost, income, and market approach.

Insurance Requirements 

Hazard insurance equal to the value of the fixed assets pledged. If collateral pledged is located in a "Special Hazard Area" subject to flood, mudslides, erosions or earthquakes, as determined by a qualified specialist, the proper insurance coverage will be required.  Workman's Compensation and Liability insurance are also required and monitored.

Life insurance policies and assignments on principals equal to the debenture amount.

Fees

Bank Senior Mortgage Fee which is a one-time fee of one-half percent (1/2%) of the principal amount of the senior mortgage associated with the 504 loan must be paid to SBA.

Debenture fees of 2-7/8% are based on and included in the debenture amount.  This charge is composed of a guaranty fee (1/2%), a funding fee (1/4%), CADDA's processing fee (1-1/2%), and an underwriting fee (5/8%). These fees are added to the net proceeds of the project cost and are repaid during the term of the loan.  Two thirds (2/3) of the CADDA fee is paid from the construction or interim loan when the construction or interim loan is closed.  The balance (one-third) is paid when the permanent loan is closed.

Annual service fees of .625% and 1/10 of 1% to Colson Services are included in the monthly payments and based on the declining outstanding debenture balance determined at five-year intervals and expressed in the "effective note rate."

Guaranty fees of .288% per annum of the principal balance as calculated at five (5) year intervals.

Late fees are assessed if loan payments are received after the 15th of the month are subject to a late fee of $100 or 5% of the payment, whichever is greater.

Prepayment Penalty

The outstanding balance of the 504 debenture may be paid prior to the maturity date, but no partial prepayments may be made.  Any prepayment made during the first half of the maturity will be accompanied by a prepayment fee, which is based on a declining percentage of the interest rate.  There is no penalty if the debenture is prepaid during the latter half of the maturity.

Environmental Audit and Risk Assessment

The Authorization and Debenture Guaranty may require an environmental audit.  The cost of performing an audit, if required, is the responsibility of the borrower, but can be included as an eligible expense in the SBA loan.

In projects involving real property, an environmental risk assessment may be required depending on the location and the current or past uses of the property.

OTHER SBA PROGRAMS

If your project does not qualify within the SBA Section 504 loan program, it may qualify under other programs.

FOR MORE INFORMATION CONTACT:

Coastal Area District Development Authority (CADDA)

WEBSITE:  www.cadda.com
501 Gloucester St., Ste. 201 , Brunswick, GA  31520
PHONE:  (912) 261-2500     FAX:  (912) 261-0032
1 Bull Street , 3 rd Floor, Savannah, GA  31401
PHONE:  (912) 236-9566   FAX:  (912) 236-9562