Introduction. New Format. New Faces. More Efficient More Convenient. More Collaborative

Transcription

1 Closing Update 2014

2 New Format More Efficient More Convenient New Faces More Collaborative Introduction 2

3 Instructors Lucy Davis Director, ThompsonMcMullan Ms. Davis practice concentrates on representing lenders and Certified Development Companies in commercial transactions, particularly SBA 504 loan transactions. She practices in Richmond, Virginia. 3

4 Instructors Ethan W. Smith Partner, Starfield & Smith, PC Ethan W. Smith's areas of practice focus on government guaranteed lending, commercial lending, banking, real estate and commercial law. Mr. Smith has closed thousands of government guaranteed loans nationwide. 4

5 NADCO Attorney Advisory Council Lucy Davis ThompsonMcMullan, P.C. 100 Shockoe Slip, 3 rd Floor Richmond, Virginia (804) Brendan DeRiggi bderiggi@certilmanbalin.com Certilman Balin Adler & Hyman, LLP 90 Merrick Avenue, 9th Floor East Meadow, NY (516) Victor Diaz vdiaz@starfieldsmith.com Starfield & Smith, PC 1101 North Lake Destiny Road Suite 105 Maitland, FL (407) Charles B. Dumas CDumas@lemerygreisler.com Lemery Greisler LLC 50 Beaver Street, 2nd Floor Albany, New York (518)

6 NADCO Attorney Advisory Council C. Thompson Tom Harley Fletcher, Harley & Fletcher, LLP 3529 Walton Way Extension Augusta, GA (706) Michael O Shea moshea@certilmanbalin.com Certilman Balin Adler & Hyman, LLP 90 Merrick Avenue East Meadow, New York (516) Todd E. Kobernick Todd@kobernick.com Law Offices of Todd E. Kobernick 2448 Historic Decatur Road, Suite 220 San Diego, California (619)

7 NADCO Attorney Advisory Council Ethan W. Smith Starfield & Smith, PC 1300 Virginia Drive, Suite 325 Fort Washington, PA (267) Jed Yaffee Lemery Greisler LLC 50 Beaver Street, 2 nd Floor Albany, New York (518)

8 AGENDA I. SOP and Regulatory Update II. Other Technical Issues/Program Updates III. Debenture Package Issues/Practice Pointers IV. Hot Topics/Legislative Update Questions? NADCO Connect coming in May! Course Security Codes 8

9 I. SOP and Regulatory Update Covers SOP updates D, E & F Includes Federal Rule to become effective 4/21/2014 9

10 1. Debenture Maximums A. General Items The gross debenture maximum increased from $1,500,000 to $5,000,000. This maximum includes all SBA loan guarantees, committed or outstanding, for 7(a) and 504 loans to applicant and affiliates). The gross debenture maximum for loans that reduce energy consumption, use sustainable designs or upgrade renewable energy sources increased from $2,000,000 to $5,000,000/$5,500,000. The gross debenture maximum for small manufacturers increased from $4,000,000 to $5,500,

11 A. General Items 2. Multiple Projects Small manufacturers and energy efficiency projects program maximum limitations are per project, not per borrower/affiliate. In order for more than one project to be approved for an applicant or its affiliates, SBA must still determine that each project meets prudent lending standards (F) Pg

12 A. General Items 3. CSA CSA changed to Wells Fargo Bank Corporate Trust Services (F) Pg As part of the transition SBA has changed two forms: Servicing Agent Agreement (SBA Form 1506) (2-2013): The Servicing Agent Agreement has been revised to replace the name, Colson Services Corp. with Wells Fargo Bank, N.A ACH (Automated Clearing House) debit form: The ACH debit form also has been revised to replace the name, Colson Services Corp. with the CSA identified in the Servicing Agent Agreement.". Process and Procedural Changes Minimal change from prior practice. The following documents are sent to Wells: Wells Fargo form cover letter*; duplicate original Note; original Servicing Agent Agreement; original Debenture; ACH w/ voided check; original W-9; and a copy of the approval from SBA district counsel*. (*new items required) The docs are due at Wells Fargo roughly 3 weeks before funding. It varies a little month to month but the dates are set out in the yearly 504 debenture funding schedule. 12

13 A. General Items 4. Superior Authority of SOP If there is any conflict between the SOP and the boilerplate, the SOP supersedes the boilerplate (F) Pg

14 A. General Items 5. Authorization Modifications Request modifications in advance of submitting debenture packages as early as possible. Changes must be approved by SBA SLPC before submitting to the district office. 14

15 6. No Adverse Change A. General Items CDC must submit finding of No Adverse Change with financial statements current within 120 days within 14 days of submission of the closing package to the district office. If the debenture does not fund, a new No Adverse Change finding must be submitted. 15

16 B. Eligibility 1. Eligible Businesses/Applicants Applicants Owned by a Trust The language Conditions that apply to trusts was changed to Conditions that apply when the EPC is owned in whole or in part by a trust (F) Pg

17 B. Eligibility 1. Eligible Businesses/Applicants Associates of Poor Character SBA cannot provide assistance to associates who are presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction (F) Pg If a subject reveals that he/she is currently on parole or probation under question 9 on a 912, the business is ineligible (F) Pg Electronic fingerprint submissions are permitted as a substitute for an FD-258 Fingerprint Card where available (F) Pg If a small business applicant is owned by a trust, the trustor must be of good character and is required to provide a Form

18 B. Eligibility 1. Eligible Businesses/Applicants Businesses owned by non-us Citizens SBA requires all lenders to comply with US Department of Treasury regulations for Customer Identification. If IRCA (Immigration Reform & Control Act) applies to an applicant, the applicant must certify that it has been more than 5 years since they were granted temporary resident status (F) Pg The language regarding collateral requirements for non citizens that are not LPR s was changed such that the liquidation value of the collateral located within the US must be at least equal to the approved loan amount at the time of the first disbursement. If the collateral declines in value, additional collateral may be required (F) Pg

19 B. Eligibility 1. Eligible Businesses/Applicants Prior Loss to the Government/Delinquent Federal Debt General The definition of federal debt does not include unpaid/delinquent taxes or loss incurred by the FDIC when it sells a loan at a discount or loans purchased, held or securitized by Fannie Mae or Freddie Mac (F) Pg The prior loss/delinquent federal debt rules apply to all Associates of the applicant. Prior Loss The definition of prior loss is expanded to include loss on sale of property following a default, bankruptcy and unreimbursed advanced payments by a Federal agency. Waiver requests with respect to the prior loss rule are sent to the SLPC. Final determinations are made by the D/FA. If the prior loss has been satisfied, the CDC may process the loan under its delegated authority without a waiver. The CDC must document in its file how the loan was satisfied. 19

20 B. Eligibility 1. Eligible Businesses/Applicants Prior Loss to the Government/Delinquent Federal Debt (continued) Delinquent Federal Debt Unless waived by SBA for good cause, SBA cannot provide assistance to a business with delinquent federal debt. Delinquency is defined in detail. CAIVRS CDCs are required to check CAIVRS. In addition to CAIVRS, the SBA and CDC may require additional due diligence to determine whether there has been a prior loss to the government (F) Pg

21 B. Eligibility 1. Eligible Businesses/Applicants Personal Resources Test Eliminated by final rule, effective April 21, FR 15641, Pages

22 B. Eligibility 1. Eligible Businesses/Applicants For-profit businesses owned by a non-profit If loan proceeds (as opposed to profits) are used to benefit the non-profit, then the for-profit business is not eligible for SBA financing. 22

23 B. Eligibility 1. Eligible Businesses/Applicants Cooperative Businesses In order for a production cooperative to be eligible both the production cooperative and each member of the cooperative must be small (as opposed to just the members themselves). Agricultural cooperatives are eligible if they meet the requirements for a production cooperative. Worker cooperatives are eligible if they meet all other SBA eligibility requirements. 23

24 B. Eligibility 1. Eligible Businesses/Applicants Businesses Involved with Promoting Religion The SOP introduced new procedure for businesses involved in promoting religion. CDCs must fill out a Religious Eligibility Worksheet. PCLP CDCs must keep it on file, while non-pclp CDCs must submit it with their application (F) Pg Certain issues involving businesses that may be engaged in promoting religion or that may have activities of a prurient nature may be referred to the Associate General Counsel for Litigation for a decision (F) Pg

25 B. Eligibility 1. Eligible Businesses/Applicants Businesses Involved with Financial Services The following exception to the rule regarding ineligibility of businesses involved in lending was added: firms that provide financial services on a fee basis can be eligible so long as the fees are not used for investments in their own portfolio (F) Pg

26 B. Eligibility 1. Eligible Businesses/Applicants Businesses Involved with Gambling In calculating the eligibility of a business involved in gambling, one should use gross revenue, not gross income (F) Pg

27 B. Eligibility 1. Eligible Businesses/Applicants Businesses Providing Prurient Sexual Material With respect to businesses providing prurient sexual material, CDCs were previously advised to consider the nature an extent of the sexual activities in view of community standards. The language community standards has been removed (F) Pg PCLP CDCs must document their eligibility analysis with respect to businesses providing prurient sexual material. Such analyses are subject to review by SBA when conducting lender oversight. Procedure is also set forth for non-pclp CDCs submitting such a review with their application (F) Pg

28 B. Eligibility 1. Eligible Businesses/Applicants Franchises General When there is a franchise/jobber agreement, the agreement must be executed prior to submission of the closing package to SBA for funding (rather than prior to first disbursement). The fact that a jobber agreement is acceptable does not mean that the small business is eligible. The CDC must still review for other eligibility issues under the SOP (F) Pg Review of a franchise agreement is conducted by SBA for all loans processed through the SLPC (rather than all regular and ALP loans) (F) Pg When the franchise is on the franchise registry, the CDC s file must contain the following: (i) executed franchise agreement and any approved attachments or exhibits, (ii) executed addendum (if required), (iii) executed certification of franchise documents, and (iv) compliance with any required eligibility notes. When a franchise is not on the registry or when the CDC chooses not to use the registry, CDCs should consult with the Franchise Findings List to determine if there have been any findings that would result in a determination of affiliation and whether there are any fixes available (F) Pg Procedures are set forth for a franchise to appeal the decision not to be placed on the registry (F) Pg

29 B. Eligibility 1. Eligible Businesses/Applicants Franchises (continued) Examples of Control Franchise agreements may not contain a provision that requires billing activities for the applicant to be handled by the franchisor or third party (rather than by the franchisor for a fee). Franchise agreements can contain language that would require a franchisee or EPC to lease property back to the franchisor for the remaining time under the agreement. The reasonability standard in this provision was removed under the (F). A transfer provision may not require consent unless such consent will not be unreasonably withheld or delayed. Reasonable business judgment is not an acceptable standard. A definition is provided for acceptable short term step-in agreements (F) Pg Clarification is made that, in the temporary personnel industry, the franchise can pay employees as long as the franchisee makes employment determinations (F) Pg Clarification is made that a right of first refusal on a partial transfer of ownership between existing owners of a franchise entity or close relatives is deemed control (as opposed to a transfer within a franchise entity) (F) Pg The following provisions were removed as examples of control: Leasing from a franchisor Termination of the franchise agreement without cause The relationship between franchisor and franchisee being that of an independent contractor. 29

30 B. Eligibility 1. Eligible Businesses/Applicants Franchises (continued) Specific Businesses For gasoline industry loans, in addition to oil supply contracts, any convenience store franchise agreements must also be reviewed. For fitness industry loans, evidence must be provided that the facility is open to both men and women, which can include separate bathrooms as well as other evidence (previously, a diagram showing separate bathrooms was required) (F) Pg

31 2. Eligible Loan Purposes OREO Financing B. Eligibility The requirement that the lender identify its costs in the property was removed. Also, the requirement that the use of proceeds for the acquisition may not exceed the greater of the liquidation value or lender s costs was removed. 31

32 B. Eligibility 2. Eligible Loan Purposes Refinance When refinancing in connection with an expansion, the loan being refinanced must have substantially been used for the acquisition of land (85% or more) to qualify for 504 refinance. The loan being refinanced can qualify even if it is a refinance as long as the original financing was substantially used for acquisition. With respect to the refinance of short term bridge financing, the SOP previously required that the land have no existing buildings. The requirement now states that there can be an existing building, provided that it will be razed prior to construction of a new building. A 504 loan may only be refinanced if it meets all other requirements and either (i) the third party loan is also being refinanced, or (ii) the third party loan has already been paid off (F) Pg

33 2. Eligible Loan Purposes Change of Ownership B. Eligibility A change of ownership being financed with a 504 loan must demonstrate that jobs would be lost were it not for the change of ownership. Only the costs associated with fixed assets can be financed through a 504 loan, all other costs (i.e. goodwill) must be financed in some other manner, including with a 7(a) loan (F) Pg

34 3. Public Policy Goals B. Eligibility Guidance is provided on meeting the energy standards as a justification for eligibility. More than a de minimis amount of energy must be generated by the project (F) Pg

35 C. Loan Conditions/Authorization Requirements 1. Guarantees If a trust owns more than 20% of the small business applicant, the trust must guarantee the loan with the trustee executing the guaranty. If the trust is revocable, the trustor must also guarantee the loan. Each 504 loan must be guaranteed by at least one individual or entity (F) Pg

36 C. Loan Conditions/Authorization Requirements 2. Insurance If the business is in a state that requires special coverage insurance (i.e. wind, hail, earthquake, etc.) in addition to hazard insurance, then the borrower must provide the special coverage (F) Pg Practice Pointer: Lenders should be sure to be added as lender s loss payee or mortgagee on such insurance as appropriate. The flood insurance requirements apply to condominiums and cooperatives. In these circumstances, both the individual and the association/co-op must obtain coverage for the interior and exterior, respectively. Reference is made to the change of the FEMA form for flood determinations (F) Pg

37 C. Loan Conditions/Authorization Requirements 3. NEHRP NEHRP provisions are included whenever loan proceeds are used for construction financing. If the financing is used for leasehold improvements that will be temporary, the CDC can request that the NEHRP requirement be removed from the Authorization (F) Pg

38 C. Loan Conditions/Authorization Requirements 4. Appraisals The appraisal may be ordered by the third party lender, but cannot be ordered by the small business applicant. An appraisal must designate SBA as either the client or the intended user. The CDC may also be designated as the client or the intended user. An appraisal must be submitted to the SLPC if (i) equity in land owned 2 years or more is being contributed as the borrower s contribution, (ii) the real estate is the third party lender s OREO, or (iii) the project is not an arm s length transaction. 38

39 C. Loan Conditions/Authorization Requirements 5. Environmental With respect to providing an indemnification for the purpose of inducing SBA to fund a loan prior to the completion of required remediation or monitoring, the indemnification cannot be provided by the borrower or the operating company. 39

40 C. Loan Conditions/Authorization Requirements 6. Occupancy/outdoor space Occupancy requirements for EPCs apply regardless of whether the real property is being leased to a commercial or residential tenant. Previously, outdoor area could not be included in the calculation of rentable property unless approved by the D/FA or designee. The change allows a CDC to make this determination if the exterior space is actively used in the borrower s business (except for parking) if the CDC can document it accordingly. 40

41 1. General D. Third Party Loans Swap contracts on third party loans are permissible, but SBA will not review or publish any guidelines with regard to the use or cost of swap contracts. Any fees owed to the swap counterparty must be subordinate to the 504 loan. 41

42 D. Third Party Loans 2. Industrial Development Bonds Projects financed by bonds, other than bonds with tax-exempt obligations, may be used to fund either the third party loan or the borrower s contribution under certain circumstances (F) Pg With respect to projects in which the third party loan is funded by a bond, there are requirements with regard to the order of recordation and transfer of property (F) Pg With respect to projects in which the borrower s contribution is funded by a bond, there are requirements with regard to the order of recordation, transfer of property and repayment of the bond obligation (F) Pg CDCs should seek further guidance from district counsel as the structure of these projects vary from state to state (F) Pg

43 3. Additional Collateral D. Third Party Loans 13 CFR revised to require that Third Party Lenders that obtain additional collateral, liquidate and apply the proceeds from the sale of such additional collateral to the balance of the Third Party Loan before applying the proceeds of sale of the subject property (Effective April 21, 2014). Applies to any type of additional collateral provided. 79 FR 15641, Pages

44 E. CAIP Community Adjustment and Investment Program CAIP is a program that assists businesses that have been negatively affected by the North American Free Trade Agreement (NAFTA). In order to qualify the business must be in an eligible CAIP community. Up to 49% of loan principal may be used to refinance existing long-term debt or to finance a change of ownership ( (F) Pg. 315). Procedure for applying for a CAIP loan is outlined. 44

45 F. Fees 1. Agents The definition of agent changed to clarify that it is a representative of the applicant. The CDC must inform the applicant in writing that the applicant does not need to utilize the services of an agent to obtain a loan. CDCs are responsible for consulting with SAM and EPLS to determine if an agent is debarred or otherwise suspended from conducting business with the government (F) Pg CDCs are responsible for reviewing SBA s webpage list of agents subject to an enforcement action or otherwise excluded from doing business with SBA (F) Pg

46 F. Fees A real estate agent that is compensated for services in brokering a real estate transaction is not an agent for the purpose of this section and does not require that the CDC obtain a Form 159. A form 159 is not required for a independent party hired by the CDC to conduct a business valuation (F) Pg

47 F. Fees 3. Professional Service Contract With respect to a professional services contract, a CDC is no longer able to pass fees down to a borrower, including loan packaging fees. 47

48 F. Fees 4. Packaging Fee Packaging fees must be reasonable and customary. They must be consistent with fees charged on similarly sized non-sba loans. If a packaging fee is based on a percentage of the loan amount, it cannot exceed 3% for loans less than $50,000 or less, and for loans over $50,000, 2% on the first $1,000,000 and an additional ¼% for any amounts over $1,000,000 with a maximum fee of $30,000. A standard fee for all applicants cannot be charged. 48

49 G. Loan Application Procedures/Controls 1. Specification is given on which exhibits to the Form 1244 require wet signatures (F) Pg The CDC can require the signature of a spouse on a credit instrument (in addition to requiring the signature of a spouse on an application) if required by federal or state law. 3. Credit reports are only required for the small business applicant, its owners and its guarantor affiliates. Credit reports are not required for nonguarantor affiliates (F) Pg

50 G. Loan Application Procedures/Controls 4. With respect to verification of tax information, if the small business applicant has filed an extension, the CDC (rather than the lender) must obtain a copy of the extension and evidence of payment of estimated taxes. 5. CDCs are required to provide a copy of the fully or partially executed sales contract with the loan application (F) Pg The third party lender s letter of intent/commitment letter is required to be submitted with the 504 loan application. If this letter of intent/commitment letter informs SBA of additional collateral being taken by the third party lender, issuance of the Authorization is deemed approval (F) Pg

51 H. Closings 1. SOP Changes: The CDC must ensure that recorded documents are cancelled of record if a loan is cancelled after closing but prior to funding. No escrow closings other than those described for construction purposes in the SOP are permitted. Documents required to be submitted for closing packages was reduced. 12 items for non-designated attorneys and 7 for designated attorneys. The responsibilities of SBA district counsel are outlined, including issuance of a debenture closing schedule, review of closing packages, QARs and CFRs (F) Pg

52 H. Closings 2. Form Changes Interim Lender Certification (SBA Form 2288) (4-2013). There are 3 changes to the form: The Certification must be signed and dated no earlier than 60 days prior to the proposed debenture funding. For example, if the proposed funding is June 11, 2014, then the Form 2288 cannot be executed earlier than April 12, In Paragraph 7 [Option 1 and Option 2], the Interim Lender agrees, within 30 days of receipt of the Net Debenture Proceeds, to record any full or partial releases regardless of the timeframes for filing releases under applicable state law. Paragraph 8 has expanded language about the Interim Lender's warranties and representations and CDC/SBA's reliance thereon. 52

53 H. Closings 2. Form Changes Borrower and Operating Company Certification (SBA Form 2289) (4-2013). There are 2 changes to the form: The Certification must be signed and dated no earlier than 60 days prior to the proposed debenture funding. For example, if the proposed funding is June 11, 2014, the Form 2289 cannot be executed earlier than April 12, The final Paragraph has expanded language about the Borrower's and Operating Company's warranties and representations and CDC/SBA's reliance thereon. These are comparable to the certifications in Part C of the SBA Form 1244 (504 Loan Application). 53

54 H. Closings 2. Form Changes CDC Certification (SBA Form 2101) (4-2013). There are 4 changes to the form: The Certification must be signed and dated no earlier than 60 days prior to the proposed debenture funding. For example, if the proposed funding is June 11, 2014, the Form 2288 cannot be executed earlier than April 12, In Paragraphs 2 and 6, the CDC certifies that all necessary agreements and certifications set forth in the Authorization have been properly completed and executed without modification, including the Third Party Lender Agreement (SBA Form 2287), the Interim Lender Certification (SBA Form 2288) and the Borrower and Operating Company Certification (SBA Form 2289). Additional information is to be inserted in Paragraph 2 about the Forms 2287 and Paragraph 12 has been expanded to list the requirements for hazard insurance. The final Paragraph has expanded language about the CDC's warranties and representations. 54

55 H. Closings 2. Form Changes Third Party Lender Agreement (SBA Form 2287). In 2013, there were major revisions to the form in April (4-2013) and July (7-2013) resulting in the following changes: (4-2013) The Recitals were made more succinct, and Recital Paragraph 2 clarifies that the 504 lien will be subordinate to the Third Party Lender Lien unless the Third Party Lender, CDC and SBA agree otherwise. (4-2013) Terms and Conditions Paragraph 1 was rephrased to state that the amount of the Third Party Loan does not and will not exceed the amount in the Authorization plus reasonable costs of collection, maintenance and protection of the Third Party Lender Lien; any excess amount will be subordinate to the 504 Loan. (7-2013) Terms and Conditions Paragraph 1 was rephrased for clarity, including that any amounts in excess of the Third Party Lender Lien (which may incorporate approved pre-existing debt) cannot be secured by a lien on the Common Collateral unless such lien is subordinate to the 504 Loan. (4-2013) Terms and Conditions Paragraph 2 now state that the Third Party Loan is disbursed according to the terms represented to CDC/SBA. (4-2013) Terms and Conditions Paragraph 3 includes a reference to criminal penalties under 18 U.S.C for false statements made to the federal government..(7-2013) but the warranties and representations of the Third Party Lender in the first sentence are limited to information provided by the Third Party Lender to CDC. (4-2013)Terms and Conditions Paragraph 4 includes a waiver of any provision in the Third Party Loan documents prohibiting an assignment of leases, rents, income or profits from the Common Collateral. 55

56 H. Closings 2. Form Changes Third Party Lender Agreement (continued) (7-2013) Terms and Conditions Paragraph 5 were revised to clarify that the Third Party Lender: (a) waives any right to enforce provisions in its documents that do not comply with the 504 Loan Program Requirements while the 504 Loan has an unpaid balance; and (b) agrees to act in a commercially reasonable manner with regard to any enforcement action. (4-2013) Terms and Conditions Paragraph 5.a. clarifies that reasonable costs of collection, maintenance and protection of the Third Party Lender Lien are permitted and not considered future advances ) Terms and Conditions Paragraph 5.b. provides that the Third Party Loan documents do not contain any early call features and..(7-2013) prohibits the Third Party Lender from making demand only when there is a material default (not a payment default) under the terms of the Third Party Loan documents, including, but not limited to, failure to make timely payments or pay taxes or violations of financial covenants which would cause a prudent lender to believe that the prospect of payment or performance of the Third Party Loan Note is impaired. (4-2013) Terms and Conditions Paragraph 5.c. prohibits cross-collateralization and was further revised. (7-2013) to provide that the Third Party Lender does not and will not use the Common Collateral to secure financing other than the Third Party Loan in a superior position to the CDC Lien unless authorized in writing by CDC and SBA. (4-2013) Terms and Conditions Paragraph 5.d. also prohibits the Third Party Lender from making demand unless there is a material default. (4-2013) Terms and Conditions Paragraph 5.e. requires that any balloon payment for the Third Party Loan be clearly identified and disclosed to SBA and approved by SBA at application or subsequently. 56

57 H. Closings 2. Form Changes Third Party Lender Agreement (continued) (7-2013) Terms and Conditions Paragraph 6 now provides that the Third Party Lender does not have to liquidate preferential collateral that has no value or that no longer exists at the time of liquidation if the Third Party Lender has so notified CDC/SBA. The prior written consent of CDC/SBA is no longer required as was the requirement under (4-2013). (7-2013) Terms and Conditions Paragraph 7 has been revised to require: the Third Party Lender to give notice to CDC/SBA (a) within 30 days after the expiration of any cure period for any continuing material default of the Third Party Loan (rather than from the date that notice of any default as was provided by (4-2013)); and (b) at least 60 days prior to any legal proceedings against or liquidation of the Common Collateral, not including sending a demand letter, rather than prior to initiating such proceedings. (4-2013) Terms and Conditions Paragraph 9 provides that Default Charges are subordinated to both the 504 Loan and lien. (4-2013) Subparagraph 9.c. provides that the Third Party Lender will only charge SBA interest at the note rate, not the default rate, in the event that SBA brings the Third Party Loan current or acquires the Third Party Loan note. 57

58 H. Closings 2. Form Changes Third Party Lender Agreement (continued) (7-2013) Subparagraph 9.d. Terms and Conditions Subparagraph 9.d. has been rewritten from the (4-2013) version to provide that if the Third Party Lender sells its Note (other than when liquidating the Third Party Loan), then the Third Party Lender must provide CDC/SBA, within 15 days of the sale, with written notice of the purchaser's name, address and telephone number and confirmation that the purchase has received a copy of the executed Third Party Lender Agreement. If the Third Party Loan is in default and the Third Party Lender, as part of its liquidation strategy, proposes to sell its Note or receives a purchase offer from a third party for the note, then the Third Party Lender must provide CDC/SBA with a 45-day option to purchase the note. If SBA does not exercise its option and the Third Party Lender sells its note, then the Third Party Lender must provide CDC/SBA, within 15 days of the sale, with written notice of the purchaser's name, address and telephone number and confirmation that the purchase has received a copy of the executed Third Party Lender Agreement. (4-2013) Subparagraph 9.e. clarifies that if the Third Party Loan note is sold or otherwise transferred to a third party, any Default Charges remain subordinate to the 504 Loan and lien. (4-2013) Subparagraph 9.f. is new and provides that all costs associated with a swap agreement are subordinate Default Charges. (4-2013) Terms and Conditions Paragraph 10 is now mandatory, not optional, and the Third Party Lender must provide copies of its appraisals, environmental investigations and title examinations or searches to CDC/SBA at no charge other than reasonable charges for photocopying. 58

59 H. Closings 2. Form Changes Servicing Agent Agreement (SBA Form 1506) (2-2013). Revised in July, 2013 primarily to implement changes associated with Colson to Wells Fargo conversion: Wells Fargo name and address filled in where appropriate. Paragraph 12 added providing for the agreement of CDC and Borrower to be bound by the terms of the MSAA. Paragraph 13 added to provide CDC s agreement regarding the withholding or transfer of CDC s fees in the event of an enforcement action against CDC by SBA or a transfer of the serving rights under the agreement. 59

60 H. Closings 2. Form Changes Opinion of CDC Counsel (Appendix D) If the CDC Counsel also represents the Third Party Lender, then the paragraph on dual representation must be added at the beginning of the opinion letter. In B.1., the CDC Counsel lists the number of 327 amendments to the Authorization. This includes 327 actions that are declined, but does not include approvals of appraisals and environmental investigations. In B.20., the name of the Interim Lender, the date of the Interim Lender Certification (SBA Form 2288) and the amount of the Interim Loan are listed. In B.21., the name of the Third Party Lender, the date of the Third Party Lender Agreement (SBA Form 2287), the amount and term of the Third Party Loan, and the location of real and personal property Common Collateral are listed. 60

61 H. Closings 2. Form Changes W-9 (rev ): The IRS has revised both the English version of the Form W-9 (rev ) and the IRS Instructions for the Requester of a Form W-9 (Rev. August 2013). The revisions are to add a box and certification for exemptions from the Foreign Account Tax Compliance Act (FATCA). These changes do not affect CDCs' use of the Form W-9 to obtain certified Taxpayer Identification Numbers or to submit an IRS Form W-9 to Wells Fargo 504 CSA. 61

62 H. Closings 2. Form Changes Compensation Agreement (SBA Form 159)(504) (2-13): The only change in the updated form is to clarify that a Compensation Agreement is not required for "an individual who only performs a business valuation as long as the individual does not provide any other services to the Applicant in connection with the loan application." 62

63 2. Form Changes H. Closings Request for Transcript of Tax Returns (Form 4506-T) (Rev. September 2013), Request for Transcript of Tax Return: SBA has added its logo in the upper-right corner of the form. 63

64 H. Closings 3. Changes to Closing Packages: There is a new version of the 504 Debenture Closing Checklist (SBA Form 2286) (4-2013) that is submitted with all closing packages. The SBA Loan Number is inserted in the Grid on Page 1 of the Checklist and in the upper right hand corner of each subsequent page: CDC-L. CDCs may omit the Instructions in the Checklist when submitting the Form 2286 with the closing package. 64

65 H. Closings 3. Changes to Closing Packages (continued) Expedited Closing Packages: For Priority CDCs represented by Designated Attorneys, the expedited closing package will now consist of seven (7) items: CDC Board Resolution (SBA Form 1528) Note (CDC/504 Loans) (SBA Form 1505) Debenture (SBA Form 1504) Servicing Agent Agreement (SBA Form 1506) CDC Certification (SBA Form 2101) Opinion of CDC Counsel (Appendix D to Authorization Boilerplate) Evidence of lien priority on real and personal property collateral Title insurance UCC lien search 65

66 H. Closings 3. Changes to Closing Packages (continued) Regular Closing Packages: For all other CDCs (non-priority CDCs or Priority CDCs not using a Designated Attorney), the regular closing package will consist of the above 7 categories of documents plus: Unconditional Guarantee (SBA Forms 148 and 148L) Lien instrument on Project [Real] Property Assignment of lien instrument on Project [Real] Property] Security agreement and UCCs [financing statements] for Project [Personal] Property and Assignment of security agreement for Project [Personal] Property Secondary collateral, including lien instruments on real property, security agreements and UCC financing statements on personal property and collateral assignments of life insurance 66

67 H. Closings 3. Evidence of lien priority on real and personal property collateral (504 Debenture Closing Checklist #7) now applies to all collateral whether Project Property or secondary collateral, and refers to both title insurance and, for real estate secondary collateral, whatever other evidence of lien priority is required in the Authorization. Requests for Notice of Default/Sale of prior liens (if required by state law) and any collateral assignment of leases and rents and reassignment by the CDC to SBA are no longer submitted as part of a closing package, but must be reflected on the title insurance policy or other evidence of lien priority (e.g., a title lien search). 67

68 H. Closings 3. Changes to Closing Packages (continued) Documents in the closing package are to be submitted in the order listed on the 504 Debenture Closing Checklist. CDCs and CDC closing counsel should follow the instructions of SBA District Counsel on how to submit closing packages via , SendThisFile, etc. Other documents are to be submitted with a closing package as required by 504 Loan Program requirements or by special request of District Counsel. 68

69 H. Closings 3. Changes to Closing Packages (continued) No longer part of a Closing Package: Copies of the Authorization for Debenture Guarantee (SBA 504 Loan) and all amendments are no longer part of a closing package. Those are the documents shipped electronically by the Sacramento Loan Processing Center (SLPC) to SBA District Counsel. The CDC closing counsel will identify the number of amendments in his/her Opinion of CDC Counsel (see below). The 504 Debenture Closing Checklist (SBA Form 2286) accompanies the closing package, but is no longer part of it. In addition, all other documents that have, until now, been part of expedited or regular closing packages will be provided to SBA in connection with Complete File Reviews (CFR). Those documents do not need to be reviewed at closing because they are covered by the CDC Certification (SBA Form 2101) and the Opinion of CDC Counsel or have been reviewed prior to closing (e.g., the SBA Environmental Indemnification Agreement). 69

70 II. Technical Issues/Program Updates 70

71 A. Dual Representation As part of SBA s proposed Streamlined Closing policy and procedures announced in January, 2013, dual representation of a Third Party Lender and CDC in a 504 Loan closing transaction would be disallowed. However, in April, 2013 SBA offered the following guidance allowing for dual representation under Information Notice Under these circumstances, dual representation will be allowed: Dual representation will not adversely affect the attorney-client relationship between CDC closing counsel and CDC; Both the Third Party Lender and CDC have expressly waived, in writing, any conflict of interest arising as a result of such dual representation and any attorney-client privilege that might otherwise attach; CDC counsel has taken all actions necessary to comply with ethical requirements applicable to attorneys in the relevant jurisdiction(s) regarding dual representation and conflicts of interest; CDC closing counsel adds a mandatory paragraph on dual representation to his/her Opinion of CDC Counsel (Appendix D to National Authorization Boilerplate); and After disbursement of the 504 Loan, neither CDC closing counsel nor any other member of his/her law firm shall represent the Third Party Lender or the CDC/SBA with respect to any issue arising out of the Project, including but not limited to any related litigation, in the event that either the Third Party Lender or the CDC/SBA objects. Whether a CDC closing counsel can serve as the CDC's approved debt collection attorney or handle documentation in connection with various servicing actions such as assumptions will be decided on a case-by-case basis, dependent on the SBA CLSC's and possibly SBA District Counsel's consent as well as that of the Third Party Lender. 71

72 B. CFR s and QAR s Complete File Reviews (CFRs) and Quality Assurance Reviews (QARs) SBA has released a new version of the 504 Debenture Closing Checklist for Complete File Review, SBA Form 2303 (4-2013), which has been modified for the changes in closing packages. The SBA Loan Number is inserted in the upper right hand corner of each page: CDC-L. The categories of documents to be reviewed have been reduced from 42 to 35 categories. Since non-alp CDCs process their no adverse change findings with the SLPC, only ALP and PCLP CDCs must submit the financial statements current within 120 days of 504 Loan closing as part of a CFR (#28). QARs for Priority CDCs with Designated Attorneys now consist of the five additional categories of documents in Items 8-12 of a regular closing package. For both CFRs and QARs, SBA District Counsel is to report all issues noted regardless of whether the CDC and CDC closing counsel have resolved them. SBA District Counsel also send copies of CFR and QAR compliance reports to the CDC, CDC closing counsel, Department of Financial Law and Lender Oversight in the Office of General Counsel, Office of Credit Risk Management (OCRM), SLPC and either the Fresno or Little Rock CLSC (as appropriate). 72

73 c. IDA/IDB/IRB Closings IDA/ IDB/ IRB Closings: For any 504 project involving an industrial development agency or similar entity, the documents governing the transaction must be submitted and approved by SLPC prior to the submission of a 504 Loan application by the CDC. These may include but are not limited to transactions involving IDAs, Industrial Development Bonds (IDB), Industrial Revenue Bonds (IRB) or Payment in Lieu of Taxes (PILOT) structures. For e504 users, the submission process is virtually identical to submitting pre-app franchise requests. You will submit these documents as: (a) Pre-App; and (b) using the existing Franchise/ Other Agreement document type. If the transaction is approved without an IDA etc. structure initially and it changes prior to closing, approval must be obtained via a 327 request. 73

74 D. Leasing/Rentable Property Calculation Leasing/ Rentable Property Calculation SBA s regulations on leasing require that the small business occupy at least 51% of the Rentable Property if the 504 Project is for an existing building and at least 60% of the Rentable Property (with the intent to move into at least an additional 20%) if the 504 Project is new construction. SBA s definition of Rentable Property until now excluded all outside areas absent a waiver. SOP (5) is now revised to provide as follows: Rentable Property is the total square footage of all buildings or facilities used for business operations (13 CFR ) excluding vertical penetrations (stairways, elevators, and mechanical areas that are designed to transfer people or services vertically between floors), and including common areas (lobbies, passageways, vestibules, and bathrooms). Rentable property may also include exterior space (except parking areas) that is actively used in Borrower s business operations. Examples of exterior space that is actively used in Borrower s business operations include: outdoor storage yards for general contractors, trucking companies, and moving and storage companies; or boat slips and docks for marinas. 5. Lender/CDC must document in its loan file the basis for determining that the exterior space is actively used in Borrower s business operations. 74

75 E. Miscellaneous Close Family Member Buyouts: Now permitted Ensure transaction is arm s length 9 Month Rule. 13 CFR (a) previously limited expenses that were eligible for 504 financing to those incurred within 9 months of application. The rule has been amended to permit financings of expenses toward a Project regardless of when they were incurred, so long as they are directly attributable to the project. 79 FR 15641, Pages

76 III. Practice Pointers/Debenture Package Issues 76

77 A. Top issues with Debenture Packages: Servicing Agent Agreement (53% of issues) Problem Type Identified Note and/or Debenture Dates are missing from the SAA (pg. 3 & 4 of SAA) Miscalculated Underwriter Fee (pg. 3 & 4 of SAA) Disbursement Amounts Miscalculated (section 6 of SAA) Wire Transfer Instructions are missing or include incorrect information Guidance Include the Note and Debenture dates and confirm that they match the respective documents Fee should be calculated based on the Total Debenture Proceeds:.4% for 20 yr. and.375% for 10 yr. Debentures Total Disbursement should equal the sum of individual disbursement amounts Confirm the following Recipient Bank information is included on the SAA: a. Routing Number b. Payoff Number c. Correspondent Bank information (needed if the Recipient Bank is not a Fed Wire institution common for smaller financial institutions. d. Obligor Number or Beneficiary Loan Number* *Note: Larger Lending Institutions need these numbers including, but not limited to JPMorgan, Wells Fargo, Citibank, Bank of America, etc. 77

78 A. Top issues with Debenture Packages: Servicing Agent Agreement (53% of issues) Problem Type Identified Guidance Returned Wires Servicing Fees are incorrectly documented (section 8 of SAA) Total Project Costs do not equal Total Project Financing (section 2 of SAA) Recipient Bank wire instructions should be confirmed with the Recipient Bank prior to submission to the CSA Confirm the correct Fee amount is listed Confirm the Total Project Costs match the Total Project Financing Net Debenture Proceeds on SAA pg. 2 do not match the Net Debenture Proceeds on SAA pg. 4 Confirm both the Net Debenture Proceeds numbers from SAA pg. 2 and SAA pg. 4 match 78

79 A. Top issues with Debenture Packages: W-9 Form (20% of total issues) Problem Type Identified Guidance Missing EIN or SSN Numbers If SAA lists the borrower name as an LLC, then the W9 must have an EIN documented If SAA lists the borrower name as an Individual, then there must be a borrower SSN documented Multiple W9 Forms submitted in the Funding Package Only one can be used by the CSA for its system, therefore indicate the primary or include only one 79

80 A. Top issues with Debenture Packages: Debenture (7% of total issues) Problem Type Identified Guidance Debenture Principal does not match the SAA Confirm the Debenture Principal on the Debenture matches the Debenture Principal on the SAA Debenture Number is Incorrect Confirm the Debenture number is accurate Debenture dates are incorrect Confirm the Debenture date is accurate 80

81 A. Top issues with Debenture Packages: ACH Form (4% of total errors) Problem Type Identified Guidance ACH Forms occasionally omit important information Confirm the following is documented within the ACH Form: a. Account number b. Routing number c. Original Signatures Voided Check information does not match information on ACH Form Confirm the ACH Form data matches the Voided Check information 81

82 A. Top issues with Debenture Packages: Miscellaneous Errors (16% of total errors) Problem Type Identified Guidance SBA Approval Missing Confirm the Funding package includes and SBA council approval Funding Documents 10 vs. 20 year Debenture discrepancy Confirm all documents accurately include reference to 10 year or 20 year Debentures, where applicable REFI / ARRA discrepancy Confirm the SAA appropriate notes whether or not a loan is a REFI or ARRA 82

83 B. Practice Pointers: Acceptable exceptions for the CDC/SBA lender s title policy Anti-Deficiency Act considerations Although the SBA Submission Package no longer requires it, make sure to provide the District Counsel an annotated copy of the Authorization with all Amendments and approvals. While the District Counsel will have their own Authorization and Amendments, it gives them your closing roadmap and helps them understand how the Amendments work together as sometimes it is not always clear unless you are familiar with the transaction. Make sure that you have the Authorization Amendments initialed by the Borrower at the closing since these happen after the Authorization is executed. If you have not worked with a title agent/closing attorney before, have them prepare a Pro forma title policy before the closing so that you can insure that your title policy will look exactly the way you need it to appear to meet the SBA requirements. This will give you time to work out all of the necessary details and requirements beforehand and make getting the policy after the closing much easier when there is normally very little time before the deadline. 83

84 IV. Hot Topics/Legislative Update Debt Refinance Items from the President s Budget A few words from Beth Solomon, NADCO President & CEO bsolomon@nadco.org (202)

85 NADCO Attorney Advisory Council Lucy Davis ThompsonMcMullan, P.C. 100 Shockoe Slip, 3 rd Floor Richmond, Virginia (804) direct dial Brendan DeRiggi bderiggi@certilmanbalin.com Certilman Balin Adler & Hyman, LLP 90 Merrick Avenue, 9th Floor East Meadow, NY E Direct (516) Victor Diaz vdiaz@starfieldsmith.com Starfield & Smith 1101 North Lake Destiny Road Suite 105 Maitland, FL Direct Dial: Charles B. Dumas CDumas@lemerygreisler.com Lemery Greisler LLC 50 Beaver Street, 2nd Floor Albany, New York Tel:

86 NADCO Attorney Advisory Council C. Thompson Tom Harley Fletcher, Harley & Fletcher, LLP 3529 Walton Way Extension Augusta, GA (706) Michael O Shea moshea@certilmanbalin.com Certilman Balin 90 Merrick Avenue East Meadow, New York Tel (516) Todd E. Kobernick Todd@kobernick.com Law Offices of Todd E. Kobernick 2448 Historic Decatur Road, Suite 220 San Diego, California (619) Phone 86

87 NADCO Attorney Advisory Council Ethan W. Smith Starfield & Smith, PC 1300 Virginia Dr., Suite 325 Fort Washington, PA PHONE (267) Jed Yaffee Attorney Lemery Greisler LLC 50 Beaver Street, 2 nd Floor Albany, New York Tel: Fax:

88 Questions? 88