NEIGHBORHOOD LENDING PARTNERS, INC.
MINIMUM UNDERWRITING CRITERIA
Economic Development Loans
With SBA 504 Loan Support
L o a n T e r m s
The following minimum underwriting criteria will be used when assessing NLP Economic Development loan applications that are being provided in conjunction with an SBA 504 loan. NLP Economic Development projects located in empowerment zones, enterprise zones, low and moderate-income neighborhoods, or other areas targeted by local governments for redevelopment will receive favorable consideration. Approved project types include commercial, franchises, manufacturing, retail and services properties where the owner occupies a minimum of 51% of the space, and in some cases, 60%. This direction provides for consistency with NLP’s Mission Statement. The underwriting criteria may be subject to revision by the Loan Committee under the direction of the Board of Directors.
General Loan Structure: NLP will be the lender of record for a first mortgage note to be funded by its Members and a second mortgage note to be funded by the SBA 504 loan program. The SBA 504 loan program is exclusively structured as a permanent loan product. Each note has its own underwriting guidelines with the SBA loan program having some limitations on the first mortgage note as well. In accordance with SBA guidelines, NLP will have to provide interim funding on the SBA note for a short period. During this interim funding period, the borrower may not receive the full benefit of the SBA 504 loan program. Non-Profit organizations are not eligible for the SBA 504 loan program.
Type: NLP loans can accommodate construction, rehabilitation (rehab), and/or acquisition mini-perm loans.
The SBA 504 loan will be structured as a fully amortizing permanent loan and will qualify for funding only after the NLP converts to/closes as a mini-perm loan.
Term: The NLP loan offers up to 18 months for a construction loan term, up to 12 months for a rehab loan term, and a minimum of 10 years with a maximum of 15 years for an NLP mini-perm loan term.
The SBA loan offers a 20-year fully amortizing loan term without any construction or rehab options. The closing of the SBA loan will coincide with the conversion/closing of the NLP mini-perm loan.
Amortization: The NLP first mortgage shall offer interest only payments during any applicable construction or rehab loan term. During the mini-perm loan term, NLP offers an amortization term of up to 25 years, depending on property type and age, with a preference to a 20 year maximum.
The SBA loan is fully amortized over its 20-year loan term.
Interest Rate: During the construction/rehab loan term, NLP offers a rate of Prime plus an appropriate spread (minimum of 25 basis points), converting to either a 5, 7.5, or 10-year adjustable rate mortgage (“ARM”) during the mini-perm term. The ARM will be priced at the rate of U.S. Treasuries of Comparable Maturities plus a spread of 250 to 350 basis points. NLP Loan Committee shall establish an interest rate floor that will be reviewed based on market parameters. NLP does not offer an interest rate cap for this product.
The SBA loan offers an interest rate that is below traditional market returns due to its federal funding source. The rates offered are dependent upon the current SBA 504 loan program parameters.
Security: The NLP note will have a first lien mortgage, collateral assignment of rents and leases, and UCC filing on furniture, fixtures and equipment. If new equipment is being financed in this SBA loan program, then the SBA note will have a first lien position on said equipment with NLP taking a second lien position.
The SBA note will have a second lien mortgage position and a first lien on any equipment being financed under the loan program.
Loan-to-value: NLP can only finance real estate holdings with its loan products, but the SBA 504 loan program allows the financing of equipment in addition to the real estate. The NLP loan offers a maximum LTV of up to 75% for the mini-perm loan term based solely on the value of the property, and a maximum of 85% during the construction/ rehab loan term.
The SBA 504 loan program permits a maximum LTV ratio of 90%, inclusive of the NLP loan and any applicable equipment being financed. At the same time, the SBA 504 loan program can only fund up to a maximum of 40%, implying a maximum funding capacity for the NLP note of 50%. However, in some instances the SBA 504 loan program may not be able to fully fund the 40% maximum. In those cases, the NLP note can increase above 50% in order to provide an overall total LTV ratio of 90%, inclusive of equipment being financed. These SBA 504 loan program restrictions may cause the NLP loan to be lower than NLP’s maximum LTV guidelines permit.
Once the SBA 504 loan closes, there is a short period that the SBA 504 note must be funded, but the SBA 504 funds will not be available for this purpose. During this time, NLP will fully fund the amount of the SBA note until the SBA funds become available; however, any proceeds that exceed the maximum NLP real estate LTV restrictions must be held in escrow by NLP. This escrow account will be held as collateral during this interim period.
As a point of clarity, the LTV restrictions provided by the NLP loan applies only to the value of the real estate collateral while the LTV restrictions provided by the SBA 504 loan also includes the value of any equipment that may be financed, inclusive of financing costs.
Loan-to-cost: The loan-to-cost ratio for the NLP first mortgage loan shall not exceed 85% of total real estate related costs, unless it is funding the SBA note on an interim basis in which case, the credit exposure of the extra funding shall be collateralized by the loan proceeds disbursed and held in an NLP escrow account.
The SBA 504 loan program permits a maximum LTC ratio of 90%, inclusive of the NLP loan, any equipment being financed as well as all financing related costs. The maximum SBA 504 loan can not exceed 40% of the total cost and, in certain instances, the maximum may drop as low as 30%. The two factors that contribute to the lower SBA 504 limits are (a) the classification of the borrower as a “Start Up” company, and (b) the real estate collateral is classified as “Special Purpose.” The SBA 504 loan program also has restrictions related to a maximum dollar amount, regardless of LTC restrictions. See the Maximum Loan Amount section below for discussion.
The SBA ratios above are calculated by the SBA loan program to accommodate SBA overall guidelines and may cause the NLP loan to be lower than NLP’s maximum LTC guidelines permit.
Debt Service Coverage: A minimum of 1.10x on total project debt (exclusive of cash flow dependent mortgages), and 1.20x on NLP debt (such debt service coverage calculation not to include debt service coverage on subordinate mortgages).
Public Subsidy: NLP will allow subordinate financing.
Prepayment Penalties: There is no prepayment penalty during the construction/rehab term. A prepayment penalty will be structured for the NLP mini-perm term, based on the specific transaction.
The SBA loan also has a prepayment penalty associated with it.
Minimum Loan: The NLP loan has a minimum loan of $250,000 for a project that is new construction and a minimum loan of $125,000 for a project that is structured as a rehab.
The SBA 504 loan program has a minimum loan amount of $50,000.
Maximum Loan: The maximum NLP loan shall be $5 million to any single project. Depending on which NLP affiliate is the lender, there may be other restrictions for credit exposure to any single developer/guarantor/ principal as well as a total credit exposure for this loan product for the respective NLP affiliate. The SBA 504 loan program has a limit of $1.5-$2.0 million for non-manufacturing companies (based on certain public policy or community development goals of the company) and a maximum limit of $4 million for manufacturing companies (based on job creation/job preservation criteria).
Pre-Leasing Requirements: 100% of all tenant space must be pre-leased that is considered to be reserved for national or credit tenants. Out of the space that is considered to be reserved for local tenants, 80% must be pre-leased. All projects may not have any more than 20,000 square feet of local tenant space. The owner must occupy a minimum of 51% of the space.
Other SBA Requirements: The SBA 504 loan program has other guidelines than listed herein that the borrower must comply. All NLP/SBA joint loan closings shall be in full compliance of all current SBA requirements.
F e e S t r u c t u r e
Application Fee: For all loan transactions greater than $3 million, the minimum NLP application fee is $5,000. For all loan transactions less than $3 million, the minimum NLP application fee is $3,000.
The SBA 504 loan program currently charges an underwriting fee equal to 0.40% of the SBA 504 loan amount.
Origination Fee: NLP charges an origination fee of 1% - 1.5% of the NLP loan amount. Determination of fees based upon such factors as size, type and complexity of loan, permanent loan term, and project sponsor.
The SBA loan program also charges two origination fees. One fee is equal to 0.5% of the first mortgage loan amount and the other fee equals 1.5% of the second mortgage loan amount. These fees are included in the overall project costs and can be financed.
Loan Processing Fee: An applicable loan processing fee will be collected at closing. The current applicable loan processing fee is $1,000. If multiple loan fundings are required, a separate loan processing fee will be charged for each funding request, ranging from $150-$300.
The SBA 504 loan program currently charges a funding fee equal to 0.25% of the SBA 504 loan amount.
Other: Borrower must also pay any legal fees, appraisal fees, inspection fees and other out-of-pocket costs whether or not the loan closes. The borrower may be able to finance a portion of these costs.
N L P G e n e r a l R e v i e w G u i d e l i n e s
Review of Project
Sponsor/Borrower: Project sponsors and borrowers will be reviewed for their development record including their construction/development history, as well as their operating and management performance for existing projects, and their credit history. For-profit sponsors and/or borrowers, if a corporation or partnership, will be required to provide three years of corporate or partnership financial statements for the borrowing entity and principals. Individuals must provide a current personal financial statement. All borrowers must provide three years of tax returns. All for-profit borrowers will be required to provide resumes of principals and organizational documents.
Appraisal
Requirements: Current appraisal by a pre-approved NLP appraiser, to be ordered by NLP or designated Member bank and paid for by the borrower/developer when ordered. The appraisal must be reviewed for compliance and there is an appraisal review fee charged, currently listed at $150. Recommended NLP appraisers and appraisal policy to comply with requirements of regulators.
Environmental
Audit/Assessment: An Environmental Audit (Phase I) is required when the transaction (loan) size is at least $1 million. When the transaction size is less than $1 million, but at least $500,000, then only a Transaction Screen Process (“TSP”) is required. All third-party environmental reports must be completed by a NLP approved Environmental Engineer and they must meet the current ASTM 1528 standards. If the site(s) are single-family infill lots or located in a developed residential subdivision, then a visual inspection may only be required. If the site(s) are not infill or located in a developed residential subdivision, a Site Inspection Questionnaire (“SIQ”) will be required when the transaction size is less than $500,000. If the scope of the work involves rehabilitation of an existing building, then research and review of lead-in-paint and asbestos issues will be required as well.
Rehabilitation/Construction
Risk Management: Review of plans and specifications, general contract and detailed total cost budget by pre-approved NLP engineer to be paid by developer; progress inspections by pre-approved NLP construction inspector and inspecting architect; soil tests for new construction; evidence of conforming zoning; utility letters; rehab escrow or disbursement on a percentage of completion basis, depending upon the extent of rehab; builder’s risk insurance for all projects with new construction/rehab, except for minor rehab that are cosmetic in nature; payment and performance bonds for all new construction/rehab loans of $1,000,000 or greater; and interest and operating reserves as required by Loan Committee. A contingency fund of 10% may be required for all loans approved for rehab of a property.
Project Review: Project review will include but not be limited to project location, feasibility, jurisdictional approvals, and community support. Favorable consideration is given to leases to a service provider when such service provider offers services that enrich the community. There may be commercial tenant/business operation restrictions.
Project Management: An experienced management agent, management plan and project manager acceptable to NLP, if applicable.
Guarantees: Full recourse will be required on the NLP loan without any burn-off provision.
Subordinate Financing: Subordinate financing allowed; pre-approval by NLP required.
Other Requirements: At Closing of a Permanent Loan, an Escrow Account must be established for RESERVES FOR REPLACEMENTS. An engineer will confirm a minimum sum that is considered adequate as recommended by NLP and approved by Loan Committee. The reserve will be paid monthly, for the life of the loan. The funds in the account can be drawn on for non-routine repairs, non-routine maintenance, or replacements. A review of the reserve requirements shall be completed every five (5) years for satisfactory coverage.
At Closing of a Permanent Loan, ESCROWS FOR TAXES AND INSURANCE will be required. Based on a full year, two months of escrow will be collected. The borrower’s monthly payment will include escrows for taxes and insurance for the remainder of the loan term. If the loan is closed late in the year, the escrows will be prorated to make sure there are sufficient funds to pay the taxes and insurance when due.
The borrower must pay all attorney fees, title insurance premiums, and fees and all other out-of-pocket expenses associated with the loan. The borrower may be able to finance a portion of these costs.
A SURVEY by a licensed surveyor satisfactory to NLP in form and content will be required.
A STRUCTURAL REPORT by a licensed engineer will be required on any loan involving major rehab or construction or when the appraisal indicates structural obsolescence or the like. NLP may require on other loans at the sole discretion of the Loan Committee. |
