SBA Approves New Statewide Certified Development Company

High Plains Financial, Inc. of Great Falls, MT was recently approved as a statewide Certified Development Company (CDC) for SBA’s 504 Certified Development Company Loan Program. High Plains Financial, Inc. is the second statewide CDC in Montana. The other is Montana Community Finance Corporation of Helena.

(Many thanks to Gloria O’Rourke of MEDA for passing this along- Russ)

The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A CDC is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide.

Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped. Generally, a business must create or retain one job for every $50,000 provided by the SBA.

High Plains Financial Inc. is the financing arm of Great Falls Development Authority, Inc. located at 710 1st Avenue North in Great Falls. John Kramer is the current President of High Plains Financial, Inc. Mr. Kramer has twenty-five years of economic development experience as the former president of Dubuque, Iowa’s and Fargo, North Dakota’s Economic Development Corporations. In those capacities he helped raise millions of dollars for economic development and structured deals with numerous companies throughout the United States that created over 100,000 jobs. Jim Kaitschuck is the Vice President of Finance at High Plains Financial and has over 20 years of experience in development financing. He served as a 504 loan officer and as a consultant to many 504 development companies during his tenure as a director of the National Development Council, one of the premier economic development finance companies in the country.

For more information contact High Plains Financial at (406) 454-1934 or log onto http://www.gfdevelopment.org. Additional information on SBA’s 504 program can also be found at http://www.sba.gov.

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Rena Carlson
Public Affairs Specialist
U.S. Small Business Administration
10 W. 15th St., Suite 1100
Helena, MT 59626
(406) 441-1081
(406) 441-1090 FAX
[email protected]

Gloria O’Rourke
MEDA – Montana Economic Developers Association
MEDS – Montana Economic Development Services
118 E. Seventh St.; Suite 2A
Anaconda, MT 59711
ph: 406.563.5259 fx: 406.563.5476
[email protected] http://www.medamembers.org

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SBA Loan Program Remains Little Known and Underused Potential Funds Remain In 504, While Other Plan Runs Short Too Quickly

By GWENDOLYN BOUNDS
Staff Reporter of THE WALL STREET JOURNAL

When lawmakers and officials from the Small Business Administration meet this week to go over next year’s loan budget request — and to wrangle about whether this year’s will fall short — they might consider the experience of Joe Bert, owner of Certified Financial Group Inc., in Longwood, Fla.

For years, Mr. Bert had his eye on a vacant 8,000-square-foot building that sat cozy to bustling Interstate 4, making it a perfect place for Mr. Bert to relocate his expanding personal-finance consultancy of 25 employees. Given low interest rates and his current monthly rent of $10,000, buying seemed a no-brainer. He shopped for a loan first at the region’s big-name commercial banks. But they all wanted a 20% to 25% down payment, which Mr. Bert knew would swallow cash he needed to buy computers, desks and advertising in the coming year. Then he saw an ad for a lender specializing in government-backed loans — called 504s — with low rates, long-term amortization and most important, only a 10% down payment required.

"It was ideal for a real-estate loan," says Mr. Bert, who used the 504 to close on the space in October, cutting his monthly real-estate payments to $6,500. "But I never knew it existed."

Potent Tool

He’s not alone. Simply put, the 504 suffers from an identity crisis. The loan program is a potent tool for small-business owners, yet the program is vastly underutilized, in large part because many entrepreneurs don’t even know what it is. Case in point: About $1.34 billion in potential 504 loan money was left on the table unused in fiscal 2003. By contrast, the government’s biggest entrepreneur loan program — with its equally mind-numbing moniker, the 7(a) — actually ran out of funds temporarily in January, sending scores of businesses scrambling to hold together deals vital to their livelihood.

This discrepancy seems particularly noteworthy considering that small entrepreneurs have helped drive the recent economic recovery. Both loan programs are designed to provide small businesses with financing that might not be available through conventional channels.

There will undoubtedly be much ado this week during the budget hearings about what happened with the 7(a) shortfall. Some lawmakers on the Senate’s Committee on Small Business and Entrepreneurship, including presidential candidates John Kerry and John Edwards, say the Bush administration isn’t appropriating enough money to cover the 7(a) loan needs of small businesses. In fiscal 2004, the SBA received authority to lend $9.5 billion, far short, the senators asserted in a recent letter, of the estimated $12 billion in 7(a) loan volume the lending industry predicts will come this year.

Given the troubles with 7(a), there is a new push among 504 enthusiasts and the SBA to make better use of this particular loan program. The 504 is intended to serve as an economic-development catalyst, and so its funds are narrowly restricted for real-estate and fixed-assets purchases, such as machinery, that might spark job creation or retention. By contrast, the 7(a) can be used as working capital for almost anything, but often gets used for the large real-estate loans when the 504 would serve borrowers just as well. Consider that last year, only 5% of the 7(a) loans were for amounts over $750,000; but that 5% ate up one-third of the 7(a)’s budget authority, says the SBA’s administrator, Hector Barreto. "We know that a lot of these loans were used for real estate and fixed assets and could have gone into the 504. We need to be promoting 504 loans … and making them more attractive."

Here’s how each loan might work in a typical real-estate transaction: While it varies by lender and region, with a 7(a) loan, borrowers on average put down a 15% to 20% down payment and the lender provides the rest, getting a government guarantee on roughly three-quarters should the borrower default.

With a 504, a borrower such as Mr. Bert in Florida typically puts down only 10%, freeing up cash to spend on other things. An additional 40% is granted at a fixed, low-interest rate for 20 years — a portion lent through SBA-certified nonprofits, which raise money through government-backed bond offerings. A commercial lender then provides the remaining 50% — taking a far smaller chunk of the deal than with a 7(a).

Critics of the two programs’ overlap say the 504 often gets overlooked because major lending-industry players — to whom small businesses often first turn for loans — have more financial incentive to recommend the 7(a) over the 504. "I’m not against 7(a)," says Christopher Hurn, president of Mercantile Commercial Capital LLC, a licensed Florida mortgage lender specializing in 504s. "But my argument is that if you took away commercial real estate as a use for 7(a), you’d have more than enough left over for all the other uses."

Leaders of the powerful lenders’ lobby disagree. "Forcing everybody into a 504 is not healthy," says Anthony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders. He says that because of the 504’s restricted uses, many borrowers with other funding needs would rather roll everything into a 7(a) loan. "A lot of applicants want to go to one spot and get it over with. We are a believer in choice." Mr. Wilkinson will testify before Congress this week.

Secondary Market

There are other considerations that can make the 7(a) appealing to commercial lenders, including a lucrative secondary market to sell the government-backed portion of the loan — something that is just heating up for the commercial portion of 504s. And until recently, banks were able to circumvent the 7(a)’s $2 million loan cap by striking "piggyback" deals. With these loans, a lender would offer a first-mortgage loan of, say, 65% and finance the remainder through a separate 7(a) loan, putting the SBA in a more precarious second lien position.

The risk of lenders’ reliance on the 7(a) was illustrated when the SBA ran out of money in January while waiting for Congress to approve its budget. Anticipating the shortfall, in December the SBA had warned that it needed to lower the cap on 7(a) loans to $750,000 from $2 million to cover pending applications. Before the lowered cap went into effect, a handful of quick-thinking lenders quickly pushed through big loans for clients, which drained the coffers. Even with the 2004 budget now approved, the residual effects are evident: the $750,000 cap is still in place as is a new SBA ban on the "piggyback" structure — which Mr. Wilkinson believes "has got to go."

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