# Presentation: 160858

## SBA 504 Lending

**SBA 504 Lending**

**Zions Bank**
**Peter J. Morgan, *****Executive Vice President***

## Zions Bank Statistics - 2006

- New SBA 504 fundings		$600 million
- Average loan Size			$750K
- 1st mortgage loan size		$100K to $8M
- Average loan-to-value (LTV)	54%
- Nationwide market			50 states
- Industries				100+

- Purchase Price			$2,000,000
- Bank 1st mortgage	  50%	$1,000,000
- SBA 2nd mortgage	  40%	$   800,000
- Borrower equity		  _10%__	__$   200,000_
- Total			100%	$2,000,000

- Typical SBA 504 Loan Structure

## Loan Terms & Structure

- _Bank 1__st__ Mortgage:_
- Generally 50% or more of project costs; cannot be less than SBA 504 loan
- No limit on $ amount of loan
- Term must be at least half that of the SBA 504 loan
- 20 and 25 year maturity common, some 30 years
- Amount and rates can be modified w/ SBA consent

- _SBA 504 Debenture:_
- Generally 40% of eligible project costs; 35% if special use or start-up, 30% if both.
- Term & maturity, 10 or 20 yrs
- No balloon payments or calls
- Loan cannot be added to or modified after closing
- Can subordinate to new 1st mortgage

## Variety of Property Types

**Generally multi-purpose...**
- 	Office, warehouse, office/warehouse mix, light industrial, retail, manufacturing, freezer/cold storage, medical or dental office & clinics
**More special-use...**
-  	Auto/motorcycle/boat dealer, pre-school, hotels/motel, restaurant, banquet/reception center, veterinary clinic, day-care, funeral home, auto repair, bowling center, health club/gym, gas station/c-store, car wash, golf course, assisted living center, grocery store, theater, marina, amusement park, etc.

## Zions Bank 504 Portfolio by Property Type

## Best SBA 504 Prospects

- Small companies experiencing rapid growth
- Small business that is out of space and wants to graduate from a lease to building ownership
- Leasing with option to purchase building
- Expanding to or opening second location
- _Things to expect if..._
- Rapid growth, business may only show ability to service proposed debt in last 12-18 months
- Start-up, prior industry experience is crucial
- 10% down payment, higher leverage and debt/worth, consider overall financial strength of total package

## Zions SBA 504 Marketing

- Branch network with managers & loan officers trained and familiar with SBA loan programs
- Small business Business Development Office calling network focusing on SBA loan opportunities
- Excellent relationship with every Certified Development Corporation (CDC) in our multi-state market footprint
- Equal bonus and incentive structure for loan officers
- Individual goals for minimum SBA $ volume

## Bank Benefits of SBA 504 Program Participation

- Loan-to-value ratio 50%, with lower probability of loss if default
- May tolerate higher default risk
- Can finance larger projects
- Ability to finance multiple projects
- Diversify project financing risk
- Secondary market liquidity
- Premium and/or fee income
- Community Reinvestment Act (CRA) Credit

## Loan Pricing & Fees

- _Bank 1__st__ Mortgage:_
- Variable repricing monthly, quarterly, or annually indexed to Prime, Commercial Paper or LIBOR
- Fixed rates for 5 -10 yrs (or full loan term) indexed to LIBOR, Fed Home Loan Bank, US Treasury, etc.
- Typical 1% origination fee, with possible interim loan fee

- _SBA 504 Debenture:_
- 20 yr fixed rate indexed to 10 yr US Treasury yield
- Origination fees 2.75%, grossed up and included in loan amount
- One-time lender fee due SBA equal to .5% of 1st Mtg

## Interim Loan Closing

- Mirror approval $ figures with CDC/SBA
- Close in accordance  with SBA Authorization
- Include construction or interim financing for SBA debenture
- One note w/ pay down or two separate notes

- Allow adequate time for interim loan (3-12 months)
- Notify CDC when project is complete and loan fully disbursed
- Follow-up to verify borrower closes its loan with the CDC

## Zions Bank First Mortgage Loan History 

- Slightly higher probability of default, however, lower losses in the event of default
- Delinquency rate of approx 1%
- Classified special mention, or substandard, 2-3%
- Principal loss rate of <10 bps (.10%)
- If default and trustee sale, SBA usually protects its 2nd lien and buys out the bank lender on newer multi-purpose properties w/equity, however, will rarely bid if special use or the equity is deemed insufficient.

## Secondary Market Benefits

- Referring lender keeps applicable loans fees plus premium
- Expand geographic markets
- Manage commercial real estate or industry concentrations
- Multiple loans to same borrower
- Finance expansions, start-ups, and higher risk industries
- High fee income with no credit risk
- Liquidity management

## SBA 504 1st Mortgage Secondary Market Example

- SBA 504 1st Mortgage Secondary Market Example

- Purchase Price			$2.0 million
-    (40,000 sf office/whs bldg)
- Bank First Mortgage		$1.0 million (50% LTC/LTV)
- Interest Rate 			7.98% (FHLB+2.75)
-     (fixed for 5 yrs, reprices every 5 yrs)
- Maturity & Amortization		25 years
- Prepayment Penalty		flat 5% 5 yrs, 5%,..1% after
- 4% Premium to Bank		$  40,000
- 1% Loan Fee			$  10,000
- 	  Less SBA .5% fee	            - _$    5,000_
- Total Income to Bank		$  45,000

## Vibrant Secondary Market

- SBA 504 First Mortgage Loans
- In 2006, approximately $7.0 billion in new first mortgage loans funded in connection with SBA 504 program, with approximately $840 million, or 12% sold into secondary market
- Average net interest spread approximately 3.00%
- Prepayment penalties (“PPP”): 50% flat 5% for 5 yrs, 30% declining 5 yrs 5,4,3,2,1%, 20% declining 10 yrs (10,9...2,1%)
- Average premium paid 5% ($35+ million paid in ’06)
- Average origination fee 1%
- Use PPP, interest rate, loan fees to maximize income