When it comes to the Small Business Administration (SBA), the emphasis on 'small' is unmistakable. Yet, behind this seemingly straightforward label lies a few misconceptions regarding what truly constitutes a small business and which projects are eligible for the SBA 504 program. WBD loan officers can help you and your customers navigate through these misconceptions. Let’s explore how big, “small” can be.
Size standards
The SBA recently updated the business size standards for 504 projects to:
- a maximum net worth of $20 million AND
- a 2-year net income average of not more than $6.5 million
These apply to the applicant business & all affiliates combined. If you are fortunate enough to be working on a project with a business that exceeds these limits, the SBA allows us to use an alternative standard based on NAICS Code, which often tips a project into the “eligible” category. Contact your WBD lender for assistance.
Project size
There are no regulatory limits regarding the overall size of the project, only limits on the size of the 504 portion of the project, which are:
- Standard 504 Debenture Maximum
- $5.0 million or 40% of the project (whichever is less)
- Subject to an aggregate SBA guarantee limit of $5.0 million
- Manufacturer or Green Energy 504 Debenture Maximums
- $5.5 million or 40% per PROJECT (whichever is less)
- Manufacturers - Unlimited aggregate SBA limit; Green Energy - $16.5 million aggregate limit
Assuming a 50/40/10% structure we can back into project sizes of $12.5 million or $13.75 million for a manufacturer or green project – sizable projects indeed, but what about a larger project? Does the 504 program still work, and does it still make sense to the lender? To the borrower? Let’s look at this $20 million manufacturing project below.
For this project the bank initially looked at both conventional financing and the 504 structure and quickly determined the SBA 504 structure was best for this not-so-small project. The 504 structure looked like this:
- First mortgage – Bank $12,622M 63.1%
- WBD/SBA 504 $5,378M* 26.9%
- Borrower Contribution $2,000M 10%
- Total Project $20,000M 100%
*(Maximum debenture size of $5.5MM is based on Gross Debenture i.e., Net Debenture of $5.378M plus upfront fees of approximately $122M.)
As illustrated, this large project fit nicely into the 504 program providing the borrower with the typical benefits inherent in every 504 project – interest rate protection with a 25-year, below market, fixed rate, a low 10% borrower contribution and the bank with a very comfortable 63% LTV first mortgage. So, were these the factors that led the bank (and borrower) to “quickly” determine this was the “best” structure? Not entirely.
The bank’s credit team looked at the project a little differently than the banker. They saw a large project in a small market being done at a high point in the real estate market. A 75 or 80% LTV today could be an 85 or 90% LTV tomorrow - something neither the bank, nor its regulators wanted to think about when the market waned.
The borrower had a few more things to consider. The principal owner had not provided a personal guarantee for many years. Now she was going to have to provide her personal guarantee on the $5.5 million 504 portion of the structure (no guarantee was required on the bank’s portion). The attributes of the structure along with her confidence in the business, were reasons enough for her to proceed with the “best” structure despite the personal guarantee. But beyond the below market rate, the preservation of cash was very important to her and her CFO. The company’s line of credit was tightly monitored, and her relationship manager always harped about the importance “availability.” The borrower maintained a good relationship with the bank and realized maintaining liquidity was a key to keeping this relationship positive and her CFO calm.
In the end, the impact of 10% cash into the project versus 20 or 25% along with the low LTV, had implications for the balance sheets of both the borrower and the bank. Positive implications reducing risks for all parties.
If you have a large client or a large project or both, contact your WBD lender to see how we might be able to mitigate some risks for both your borrower and your employer.
