Industry Watch

Tycoons co-owners Tim Nelson (left) and Rod Raymond

A business loan fit for Tycoons

How a restaurant/brewpub operator in Duluth secured a favorable loan to expand its business

By J.D. Kramer

Just as a machine needs every cog to fall into place, a business loan necessitates cooperation between multiple parts. Jerry Peterson knows this well. Currently the CEO of Just Take Action  an operator of restaurants and brewpubs in Duluth  and previously a business consultant, Peterson is well acquainted with the various loan options available to small companies.

When it came time to expand operations through the addition of Tycoons Alehouse & Eatery, Peterson and his colleagues selected a Small Business Administration product known as the SBA 504 Loan.

This loan is used only for fixed-asset financing, has a maximum amount of $5 million, and requires contributions from three key players: the business owner, the bank, and a community development corporation (CDC) working in conjunction with the SBA.

So just how did all of these participants come together in the case of Tycoons? Here's what happened, from the perspective of each party:

1. The company

Just Take Action's portfolio already included Fitger's Brewhouse Brewery, Fitger's Brewhouse Restaurant, Red Star LoungeBurrito Union, and a small fitness center. The idea to add Tycoons to the portfolio arose because of the "success of our other ventures and the thought that we still had plenty of people in Duluth that needed another place to come and experience the city," says Peterson.

Tycoons is set in Duluth's historic city hall, which, before the loan, required major renovations. To pay for the renovations and new restaurant equipment, the company needed to choose a loan package involving about $1.65 million from a range of options. Among them were two products from the Small Business Administration: the SBA 7A Loan and the SBA 504 Loan. The firm chose the latter. "The 504 allowed us more depth in refinancing, and it came at a time when fees were also minimized," explains Peterson.

Those reduced fees are no longer in place  the American Recovery Act of 2010 eased the cost of borrowing money for two years by decreasing the underwriting fee from 2.5 percent of the loan to 1 percent. The fee jumped back up to 2.5 percent in May 2012.

The SBA still offers refinancing packages to borrowers purchasing an SBA loan product like the 504 Loan. It also offers borrowers low fixed-rate interest on either 10- or 20-year loans. (Just Take Action selected the latter).

So how did the company instill confidence in its lenders? According to Tim Meininger, president of the Duluth branch of Beacon Bank, "Jerry [Peterson] really had the information laid out for us. He had the projections, he had the costs, he had a business plan  he had everything laid out."

Tom Saehr, the president and CEO of Minnesota Business Finance Corporation (MBFC), the involved CDC, adds that, "They train their staff very well, and the food they prepare is top-notch, so that made us very comfortable."

The loan recipient must also contribute certain things. Namely, it must put in, at minimum, 10 percent of the project costs  a small burden relative to the 25 to 35 percent borrowers must contribute with conventional bank loans. Naturally, the borrower may contribute more. Just Take Action furnished the standard 10 percent, or $165,000, of the $1.65 million it borrowed.

The borrower interacts primarily with the bank. The CDC/SBA is normally brought in after the bank makes a decision about supplying the loan.

The Tycoons case, however, was slightly different. In 2010, the company submitted a formal proposal to its original commercial lender, which then approached and eventually gained approval from MBFC. However, the company had to switch lenders multiple times because of capitalization issues with the various banks it had selected.

Eventually, Just Take Action and MBFC worked with the Duluth Economic Development Authority, which in turn referred them to Beacon Bank. Throughout this process, the company maintained its approval from the SBA through MBFC, and it effectively approached Beacon Bank as a "packaged deal."

After gaining approval from Beacon, the company was left with two loans: one from the bank for 50 percent of the $1.65 million they borrowed, and one from MBFC for 40 percent of the borrowed money (with the leftover 10 percent coming from equity).

2. The bank

Under normal circumstances with a 504, the commercial lender will put together the two loans, usually worth 50 and 40 percent, respectively, and will then sell off the one worth 40 percent to the CDC after the SBA agrees to the transaction.

If the SBA does not approve the borrower's request, the bank could end up with the two loans and would thus be responsible for 90 percent of the borrowed money. "They're the bank's loans and it's the bank's risk until all the requirements like that are checked by the SBA," says Meininger. "In the short run, the bank is assuming 90 percent of the risk."

The bank, he says, has to make sure the proposal seems attractive to the SBA, but "in the 20-plus years that I've been working with 504s, I've never had the SBA not buy a loan."

The bank has a few advantages if the SBA approves the deal. As mentioned, it assumes responsibility for only 50 percent of the loan  that's compared to 65 to 75 percent with a standard-issue loan. Plus, it ends up with the first lien on the project, should anything go wrong.

Beacon Bank, however, was not exposed to this sort of risk in the Tycoons case. The SBA had already agreed to purchase a loan worth 40 percent of the requested $1.65 million from a commercial lender and to furnish that loan through MBFC. Therefore, the CDC and the company were only looking for a bank to put the two loans together  a role that Beacon Bank accepted.

"It was particularly favorable because we felt comfortable with the borrower and the history they've had in this kind of business," says Meininger.

3. The community development corporation

The SBA 504 Loan is only made possible through community development corporations like MBFC. "The 504 program was put together to foster job creation and retention, and so that's sort of a big part of our mission statement," says Saehr.

The CDCs are set up as 501(c)(3) nonprofits with the primary goal of selling SBA loans to banks, which in turn sell them to business owners. Minnesota is home to several CDCs. The state's SBA district office is ranked seventh in the nation in terms of the number of SBA products sold.

MBFC specializes in the SBA 504 Loan, with a portfolio of 662 loans worth $242 million, making an average loan size of $685,000 during the 2012 fiscal year. The interest (or effective rate) charged on a 20-year fixed-rate 504 was, as of December, 4.01 percent  an all-time low. The interest charged on a 10-year fixed-rate 504 was 3.52 percent in November.

Scott Hoeschen, a vice president of business development and the loan officer representing MBFC in the Tycoons deal, explains that, "Once we approve the loan, that gives the bank the go-ahead, because they actually provide all the construction financing, and we don't close until everything is complete."

From there, MBFC sells its portion of the loan on the bond market, according to Meininger.

Helping Tycoons, no doubt, was the fact that Saehr and his colleagues view it as "more than just a restaurant."

"It's the old city hall. It's the old jail. It's a historical site, and they've really kept that flavor," he says. "It is really cool."