Statutory Requirements

Transcription

1 In December 2015, SBA received statutory authority to reauthorize the 504 Debt Refinance Program for up to $7.5 billion. This is in addition to the $7.5 billion authorization for the 504 program. With this change, total 504 lending has a $15 billion authorization. SBA has published the Interim Final Rule on May 25, 2016 and the Policy Notice on May 26, SBA officially launched the 504 Debt Refinancing program on June 24, The Interim Final Rule was effective June 25, Statutory Requirements Three statutory requires include: 1.) 504 program must be at zero subsidy 2.) 504 refinance loans are limited to 50% of the CDCs previous fiscal year financing 3.) 504 alternative job goal In Jobs Act eliminated. 3 1

2 Notices Policy Notice Effective date November 27, 2016 Policy Notice All regulations and standard operating procedures of the 504 Program apply to refinancing, under the Act, with some modifications as identified in SBA Policy Notice Information Notice Forms changes are identified Forms 1233, 2450, 2234, 1506, 2288% and Policy Notice Eligibility Determination of new business if partial or total change of ownership Loan to Value Limitation for the Financing of Business Operating Expenses increased from 75% LTV to 85% LTV Appraisals may be dated within one year of 504 loan approval instead of 6 months Escrow Account Optional for same institution debt Guidance on waivers of the rule that CDC s new financings under the 504 Debt Refinancing Program during any fiscal year cannot exceed 50% of the dollars the CDC approved under the 504 Loan Program during the SBA s previous fiscal year. 5 Fees For loans approved under the 504 Debt Refinancing Program during FY 2017, the total annual guarantee fee was 0.731% (73.1 basis points). During FY 2016, the total annual guarantee fee was 0.958% (95.8 basis points). The fees for 504 Debt Refinancing will be reassessed annually. 6 2

3 Eligible Business Expenses Eligible Business Expenses are limited to the following business expenses: Other Secured Debt means debt that has been secured for at least 2 years prior to the date of application by the same Eligible Fixed Asset(s) securing the Qualified Debt and for which the Borrower has been current on all payments due for not less than one year preceding the date of application. Current on all payments due means that no payment was more than 30 days past due from either the original payment terms or modified payment terms (including deferments) if such modification was agreed to in writing by the Borrower and the lender of the existing debt not less than one year prior to the date of application; and Business Operating Expenses means business expenses other than Qualified Debt or Other Secured Debt, including salaries, rent, utilities, inventory, or other obligations of the business that were incurred but not paid prior to the date of application or that will become due for payment within 18 months after the date of application. 7 Loan to Value Limitations For projects that refinance only Qualified Debt and Other Secured Debt the maximum loan to value of the Refinancing Project allowed is 90%. For projects when the amount of Qualified Debt and Other Secured Debt being refinanced is more than 90 percent of the value of the Eligible Fixed Asset securing the Qualified Debt the Borrower must provide additional cash or other fixed asset collateral acceptable to SBA so as not to exceed a 90% loan to value of the Refinancing Project. For any projects that include the financing of Business Operating Expenses a maximum 85% loan to value of the Refinancing Project will apply and the Business Operating Expenses portion of the project may not exceed 25% of the value of the Eligible Fixed Asset(s) securing the Qualified Debt. Any fixed assets needed to satisfy the 90% loan to value requirement set forth above will not serve to increase the amount of Business Operating Expenses that may be financed. 8 Eligible Business Expenses the application must include a specific description of the Eligible Business Expenses and an itemization of the amount of each expense, with the Form 1244 certification of the accuracy of this information. The borrower retains the Eligible Business Expenses documentation. It is not included in the application or retained by the CDC. 9 3

4 Transcripts The CDC must submit a transcript of the previous 12 month payment history on the Qualified Debt and Other Secured Debt being refinanced which confirms that the Borrower is current on all payments due as defined in Policy Notice for not less than one year preceding the date of application. (Exhibit 21 of SBA Form 1244). 10 Lien Verification Documentation on Debt Refinanced In considering the Borrower s application, the CDC must obtain evidence that lien(s) are securing the Qualified Debt and any Other Secured Debt with Eligible Fixed Asset(s), and state in its credit memorandum that it has verified that the lien(s) has been in place for at least 2 years prior to the date of application. The CDC must retain the evidence of the liens in its records (e.g., Preliminary Title Report, Mortgage Deed of Trust, or UCC-1 filing). 11 Eligibility Requirements Borrower must have been in business for at least 2 years and the most current Note (if refinanced) in existence for 2 years. If the ownership of the OC or EPC has changed during the 2 year period, the CDC must follow the new business guidance in SOP (I), and determine whether the Borrower is considered a new business and document it in the credit memorandum. 12 4

5 Refinancing Project The Fair market value of the Eligible Fixed Asset(s) securing the Qualified Debt and any other fixed assets acceptable to SBA (Additional fixed assets may be added only when needed to comply with 90% loan tovalue limitation). 13 Qualified Debt Incurred not less than 2 years before the date of the application for assistance Is a commercial loan Is not subject to a guarantee by a Federal Agency The proceeds of which were used to acquire an eligible fixed asset Was incurred for the benefit of the small business concern 14 Qualified Debt (cont.) Is collateralized by eligible fixed assets Borrower has been current on all payments for not less than 1 year before the date of application. May consist of a combination of two or more loans, provided that each of the loans satisfies the Qualified Debt requirements. 15 5

6 Other Application Documentation Requirements Credit memorandum The CDC must provide an analysis in its credit memorandum that the proposed debt refinancing satisfies each of the requirements of the 504 Debt Refinancing Program. Appraisals Appraisals are not required at time of application. Appraisals dated within 1 year of the date the application was approved are required prior to closing. Appraisals must otherwise comply with the requirements for appraisals set forth in SOP (I). Transcripts See updated Streamlined Documentation Process in Policy Notice Lien Verification See updated Streamlined Documentation Process in Policy Notice Financing for Business Expenses See also Clarification of Definition of Eligible Business Expenses and Loan to Value Limitations clarifications in Policy Notice The 504 Debt Refinance Program may provide refinancing of qualified debt and other secured debt in addition to the refinancing of business expenses. SBA has updated its procedural guidance on eligible business expenses and loan to value limitations. 17 Application Documentation See also revised documentation guidance in Policy Notice An application for financing shall include a specific description of the expenses for which the additional financing is requested and an itemization of the amount of each expense. 18 6

7 PCLP Restriction Loan applications for assistance under the 504 Debt Refinancing Program must be processed by SBA and may not be approved by CDCs under PCLP authority. 19 Occupancy Requirements Borrowers for the 504 Debt Refinance Program must meet all current 504 Loan Program occupancy requirements at the time of application. 20 Interim Lender Documentation The Interim Lender must execute SBA Form 2288R, Interim Lender Certification for Refinancing Program, similar to what is required in all 504 closings. 21 7

8 Same Institution Debt When the loan being refinanced is Same Institution Debt (as defined in 13 CFR (g)(15)), the Third Party Lender may modify its existing loan documents (Note, Deed of Trust/Mortgage, etc.) instead of requiring the Borrower to execute and record new loan documents for the Third Party Loan. All modified loan documents must meet SBA s regulatory requirements for a Third Party Loan (see 13 CFR and ). 22 Same Institution Debt (cont.) When the loan being refinanced is Same Institution Debt, no Interim Lender may be used; an escrow account is optional, and: The Third Party Lender (who, in this case, is also the Lender of the debt being refinanced) must execute SBA Form 2416, Lender Certification for Refinanced Loan if an Escrow Account is used, and a 2288R if an Interim Lender is used. The CDC must create an escrow account at the time of closing of the 504 loan for the purpose of holding the Borrower s cash contribution, if any, and the net debenture proceeds (see Policy Notice for further instructions.) 23 Same Institution Debt (cont.) The following requirements apply to the escrow account ( the account ): The account will be established in accordance with an Escrow Agreement which must be executed by the Borrower, the Third Party Lender, the Escrow Agent and the CDC. The account may be held by the CDC attorney, Title Company or other party approved by SBA District Counsel. The Borrower s cash contribution, if any, must be deposited into the account at the time of closing of the 504 loan. A copy of the Escrow Agreement must be provided to the SBA s District Counsel with evidence of funding by Borrower s cash contribution, if any, at the time of closing of the 504 loan. The net debenture proceeds must be wired to the account, and all funds may be released only upon written approval by the CDC and SBA, provided that CDC/SBA have the required lien positions on the collateral as set forth in the Authorization and Debenture Guaranty. The debt to be refinanced will be satisfied by payment of the escrowed funds to the Third Party Lender. 24 8

9 Other Than Same Institution Debt When the loan being refinanced is not Same Institution Debt, SBA may permit the lender of the debt to be refinanced to assign its existing loan documents to the Interim Lender if an Interim Lender is used, or to the Third Party Lender if no Interim Lender is used. The existing loan documents may be modified, as appropriate, rather than requiring that new documents be executed for the Refinancing Project. The Interim Lender, if any, may then assign the documents to the Third Party Lender. 25 Waiver Guidance Under the 504 Debt Refinancing Program, new financing during any fiscal year cannot exceed 50% of the dollars the CDC had approved under the 504 Loan program unless waived for good cause: The borrower does not have access to other sources of financing, including other CDCs that have not exceeded their 50% cap; and The CDC has a loan with the Borrower that is current

10 Comments There is no Qualified Debt to refinance so the project would not be eligible under this program. Each project must have a Qualified Debt to be eligible

11 Comments The Qualified Debt is eligible however only $250,000 of the request for Business Operating Expenses is eligible. These expenses are limited to 25% of the Refinance Project amount. 11

12 For more information about the 504 Debt Refinance Program contact: Linda Reilly, Chief of 504 Program Branch Babak Hosseini, Financial and Loan Specialist, 504 Program Branch David Miller, Supervisory Loan Specialist Sacramento Loan Processing Center Debt Refinance Resource page: Find a Certified Development Company:

13 Completing the Form 912 Package Presentation for SBA Lenders and CDCs SBA Form 912 Package When is it necessary to complete the Form 912 package? When is it necessary for a Lender or CDC to submit the 912 package to the SBA? When is it appropriate for a Lender or CDC to retain the 912 package, without submitting to the SBA? 7(a): Form 1919 The Borrower Information Form 504: All applicants & subject individuals complete SBA Form When Form 912 Package is not Required 7(a) Ineligible If individual answers Yes to question 1 on Form 1919, or if response to question 3 reveals he or she is currently on parole or probation, the applicant is ineligible and thus the package is not required If an individual answers No to questions 1, 2, or 3 on Form 1919, the package is not required 3 1

14 When Form 912 Package is not Required 504 Ineligible If individual answers Yes to question #7 on Form 912, or if response to Question #8 reveals he or she is currently on parole or probation, the applicant is ineligible and thus the package is not required If an individual answers No to questions 7, 8, and 9 on Form 912, the package is not required. 4 When Form 912 Package is Required 7(a) If an individual answers Yes to questions 2 or 3 of Form 1919 If disclosed crimes were misdemeanors dispositioned by the court less than six months ago, crimes against a minor (e.g. child abuse, or endangerment, possession of child pornography, etc.), or felony convictions Exception: If disclosed crimes were misdemeanors dispositioned by the court more than six months ago, with no crimes against a minor, lender should retain the 912 package in loan file without submitting to SBA 5 When Form 912 Package is Required 504 If an individual answers Yes to questions #8 and/or #9 of Form 912 If disclosed crimes were misdemeanors dispositioned by the court less than six months ago, crimes against a minor (e.g. child abuse, or endangerment, possession of child pornography, etc.), or felony convictions Exception: If disclosed crimes were misdemeanors dispositioned by the court more than six months ago, with no crimes against a minor, CDC should retain the 912 package in loan file without submitting to SBA 4/3/

15 Complete Form 912 Package 1. Lender/CDC Cover Letter 2. Completed SBA Form Statement of Offense(s) 4. Additional Court Documents 5. Fingerprint Card Note: SBA will return any incomplete packages 4/3/ Point of Contact Lender/CDC name Lender/CDC address Lender/CDC Cover Letter Lender/CDC phone number and address 8 SBA Form 912 Sections 1a 6 Please remember to complete this section Please remember to handwrite initials (do not type) 9 3

16 SBA Form 912 Sections 7 Signature Please remember to handwrite initials (do not type) Please remember to fill out these sections of the form. 10 Statement of Offense(s) Statement should include: Date of offense(s) City and state or the county and state where the offense(s) occurred The specific charge(s) [DUI, assault, forgery, etc.] AND the level of the charge; (either a misdemeanor or felony) Disposition of the charge(s) State that all conditions have been satisfied, provide documentation Dated signature on the explanation Any other pertinent information 11 Fingerprint Card When an applicant discloses a felony arrest a Fingerprint Check is required and a Fingerprint Card must be completed No copied/scanned fingerprint cards will be accepted only LiveScan or hard card is allowed 12 4

17 Fingerprint Card Sample Card must be completed using black ink All yellow highlighted areas must be completed These boxes should be filled with the actual fingerprints 13 General Tips for Completing the 912 Package Write legibly. We strongly recommend typing, if possible. Include information from all previous felony convictions Package Submission Delegated Lenders: Office of Personnel Security (OPS) 409 3rd Street SW SBA Headquarters 5th floor Washington, DC To OPS complete 912 packages send to: 7(a): Non delegated Lenders: Local SBA District Office or Loan Guaranty Processing Center (LGPC) All 504 CDCs must submit the Form 912 package to: Sacramento Loan Processing Center (SLPC) 15 5

18 SBA Form 1081 CDCs, SBLCs, and Community Advantage Lenders should continue to follow the submission procedures for Forms 1081/resumes (and Fingerprint Cards, if required) to the SBA Office designated in SOP Include a coversheet identifying a point of contact for communication and stating whether the individual is a staff member, Board member, etc. 16 SBA Form 1081 Submission CDCs: send to District Office SBLCs: send to Office of Financial Assistance Community Advantage Lender applications: send to Office of Credit Risk Management 17 Notice and CFR Link to Notice for SBA Form 912, SBA Form 1081, Fingerprint Cards Link to 13 CFR (n) 18 6

19 Contact Information For more information on the 912 Package please contact: Justine Alston Financial Analyst Office of Financial Assistance

20 Primary purpose of Franchise revisions is to streamline procedures for determining size eligibility based on affiliation between Franchisee & Franchisor New procedures apply to all SBA applications on or after 1/1/2017, per SOP (I) Regulatory Changes 13 CFR (f)(5) (effective July 2016) o Affiliation based on franchise and license agreements. o The restraints imposed on a franchisee or licensee by its franchise or license agreement generally will not be considered in determining whether the franchisor or licensor is affiliated with an applicant franchisee or licensee provided the applicant franchisee or licensee has the right to profit from its efforts and bears the risk of loss commensurate with ownership. SBA will only consider the franchise or license agreements of the applicant concern. 2 New Franchise Review Guidance NO CHANGE To be eligible for SBA financing, Applicant must: 1. Be independently owned/operated, small, and not dominant in its field 2. Have right to profit from its efforts and bear risk of loss commensurate with Ownership NEW SBA has eliminated the need for SBA to: 1. Review franchise and license agreements to determine affiliation between franchisor and franchisee 2. Maintain an internal or external centralized listing of franchise systems where the franchisor and franchisee are not considered affiliated 3. Maintain an internal or external centralized listing of franchise findings 4. Utilize the Franchise Registry or FRUNS numbering system 3 1

21 Franchise and License Agreements Policy Notice , effective February 14, 2017 SOP (I) o 7(a): page 81 o 504: page 228 Apply to agreements/relationships: Small Business Applicant ONLY not affiliates Projects that meet Federal Trade Commission (FTC) Franchise definition in 16 CFR 436 Covered by Petroleum Marketing Practices Act (PMPA) e.g., gas stations 4 Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which terms of offer of contract specify, or franchise seller promises or represents, orally or in writing, that: a. Franchise will obtain right to operate a business that is identified or associated with franchisor s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with franchisor s trademark; b. Franchisor will exert or has authority to exert a significant degree of control over franchisee s method of operation, or provide significant assistance in franchisee s method of operation; and c. As a condition of obtaining or commencing operation of franchise, franchisee makes a required payment or commits to make a required payment to franchisor or its affiliate. Agreement/Relationship must meet all three elements of the franchise definition to be deemed a franchise. Agreement/Relationship CAN meet FTC franchise definition even if not called a franchise -- e.g. Best Western = membership agreement 5 The first element of a defined Franchise relationship is characterized by the use of the Franchisor s trademark, even if the trademark is not registered. According to FTC guidance, the term trademark is intended to be read broadly to cover not only trademarks, but any service mark, trade name, or other advertising or commercial symbol. Note, the definition says the franchisee has the right to operate a business that is identified or associated with the franchisor s mark; it doesn t have to actually be used. Also, if the franchisee is specifically prohibited from using the mark, then the arrangement does not meet the FTC definition. 6 2

22 The second element defining a Franchise relationship is the issue of control. Again, according to the FTC, in order to be deemed significant, the control or assistance must relate to the franchisee s overall method of operation not a small part of the franchisee s business. Control or assistance involving the sale of a specific product that has, at most, a marginal effect on a franchisee s method of operating the overall business will not be considered in determining whether control or assistance is significant. Examples of control that may be deemed significant include: site or location approval; specification of site design or appearance requirements; specified hours of operation; specified production techniques; and mandated accounting practices. On the other hand, promotional activities without additional forms of assistance, generally will not be deemed significant. For additional examples of what activities the FTC may consider significant, see the FTC Franchise Rule Compliance Guide at 7 The third element to the FTC definition is payment to the franchisor or its affiliate of at least $500 any time prior to or within the first six months of the commencement of operations of the franchised business. According to FTC guidance, the term payment is intended to be read broadly, capturing all sources of revenue that a franchisee must pay to a franchisor or its affiliate for the right to associate with the franchisor, market its goods or services, and begin operation of the business. (FTC Franchise Rule Compliance Guide, pg. 5.) Examples of required payments include: initial franchise fee; rent; advertising assistance; equipment and supplies (including such purchases from third parties if the franchisor or its affiliate receives payment as a result of the purchase); training; security deposits; escrow deposits; non-refundable bookkeeping charges; promotional literature; equipment rental; and continuing royalties on sales. The term does not include, however, payments made for reasonable amounts of inventory at bona fide wholesale prices for resale or lease to the public. Every payment that is made, no matter what it purports to be for or what it is called, is subject to being classified as a franchise fee. Therefore, the SBA Lender should carefully analyze each payment that the Borrower expects to pay or has paid to the Franchisor in determining whether any of the payments are considered a franchise fee under the third element of the definition. 8 Guidance for Applicants with Multiple Agreements at one location (e.g., Independent insurance agents, Independent tire retail stores, etc.): 1. Review applicant s revenue sources do any meet the FTC definition of franchise? 2. How much of the applicant s revenue do the agreements meeting the FTC definition of franchise constitute? 3. Determine whether any agreement/relationship which meets the FTC definition of franchise constitutes a critical portion of applicant s revenue 4. For any agreement deemed critical, Lender/CDC must obtain all Required Documentation and follow Franchise Review Process. Lenders/CDCs must continue to ensure that all aspects of the project are eligible business types, despite the percentage of revenue they generate. 9 3

23 1. Copy of Franchise Agreement 2. SBA Addendum to Franchise Agreement (SBA Form 2462) OR Temporary Alternative Documentation: Certification (SBA Form 2463) and SBA Negotiated Addendum (ONLY available when SBA and Franchisor have previously negotiated addendum specific to 2015 or 2016 franchise agreements) o Addendum/Temporary Alternative Documentation overrides franchise agreement provisions in conflict with SBA requirements o Only addresses affiliation between Franchisor and Franchisee o No alterations allowed to SBA Form 2462, SBA Form 2463, or an SBA Negotiated Addendum 3. Any related documents of which franchisor requires franchisee to execute or acknowledge receipt (For example: Purchase Option Agreements, SNDAs, Lease Option Agreements, Covenants and Deed Restrictions, and Right of First Refusal documents) 10 Form now includes option to allow the entity to select the appropriate type of agreement and the proper titles of the parties to the agreement

24 NO CHANGE Lenders and CDCs are still responsible for reviewing relevant agreement(s) to ensure applicant meets all SBA eligibility requirements Franchisee is an eligible business type e.g., Not passive business, no restrictions on patronage Specific prohibited collateral restrictions e.g., No deed restrictions in Purchase Contract, restrictions in Dealer Agreements CDC determines whether applicant is a franchise/meets FTC definition of Franchise 2. CDC reviews agreement(s) and all related franchise documents for Eligibility Issues 3. CDC obtains Addendum to Franchise Agreement (or Temporary Alternative documentation, if applicable) 4. Pre Application Review Request to SLPC via e504 Include all Required Documentation, whether executed or not 5. SBA reviews documentation and, if all franchise documentation is approved, SBA issues franchise approval/clearance* to CDC *Disclaimer Issuance of franchise clearance does not constitute loan approval CDC submits 504 Loan Application Include franchise clearance from Pre-App Review in Exhibit 13 (Form 1244) 7. SLPC reviews application. If approved, provides Loan Authorization When all Required Franchise Docs are executed SLPC sends approval notification to CDC When all Required Franchise Docs are NOT executed SLPC inserts Franchise Doc requirement language in the Authorization PCLP CDC manually inserts language in Authorization Amendment prior to 504 loan closing Required if documentation is not executed at Pre Application Review step All executed documentation submitted to SLPC via 327 Amendment 327 Amendment approval meets franchise condition of Authorization CDC must obtain executed Franchise Agreement(s) and Addendum(s) BEFORE Interim Loan is funded, in order to protect Interim Lender. 15 5

25 16 1. Lender determines whether applicant is a franchise/meets FTC definition of Franchise 2. Lender reviews agreement(s) and all related documents for Eligibility Issues 3. Lender obtains Addendum to Franchise Agreement (or temporary alternative documentation) 4. Process loan application Delegated Lenders: Obtain executed Agreement, Addendum (or temporary alternative documentation), and copies of any other document(s) that the franchisor requires the franchisee to sign or acknowledge receipt of prior to disbursement of funds and maintain all franchise documents in loan file. Non-delegated Lenders: Send application to LGPC with a copy of the Agreement; the Addendum or temporary alternative documentation (whether executed or not); and copies of any other documents of which the franchisor requires the franchisee to sign or acknowledge receipt. 17 Non-delegated Lenders: 5. LGPC will review Lender s eligibility determination and credit underwriting and, if approved, provide Loan Authorization If all Required Franchise Docs are executed at time of submission LGPC sends approval notification to Lender If all Required Franchise Docs are NOT executed at time of submission LGPC inserts Franchise Doc requirement language in the Authorization 6. Lender must obtain executed Agreement, Addendum (or temporary alternative documentation), and copies of any other document(s) that the franchisor requires the franchisee to sign or acknowledge receipt of prior to disbursement of funds and maintain all required documentation in loan file. 18 6

26 19 All lenders must identify the applicant as a franchise using the Franchise Identification Number (SLPC inserts on behalf of CDC). When entering a loan via etran or SBA ONE, Lender is prompted to answer the question, Is this a Franchise? with yes or no. A drop down box will appear on yes answers with a list of Franchise names from which the Lender selects the franchise that the applicant owns or will purchase. 20 If franchise is new or does not have a Franchise Identification Number, Lender must request issuance of a Franchise Identification Number from the Office of Financial Assistance. 1. Send an to FranchiseFY17@sba.gov with the Franchise Disclosure Document (FDD) pages sufficient to provide these answers: a)legal name of franchisor b)trade name or d/b/a of franchise system c) Issuance Date of the FDD d)state of Organization for the Franchisor 2. For Dealer/Fuel or jobber agreements that do not issue an FDD, provide all documentation that the licensor/dealer is required to execute or acknowledge receipt of so SBA can determine if it meets the FTC legal definition of a franchise. The assignment of a franchise code is solely for the purpose of tracking loans to a specific system. Issuance of a franchise code to a particular system that does not mean that SBA has determined that the system meets the FTC definition of a franchise or determined that it is eligible for SBA financial assistance. 21 7

27 22 Q2: Are Addendums loan specific? Should Lender/CDC add loan number to Addendum? No. The Addendum is valid for the life of the specific Franchise Agreement and can be used for multiple loans to that applicant. Q3: If franchisor signs addendum and there is another SBA franchise loan with the same borrower, can they use same addendum? Yes. However, if there are multiple locations of the franchise: Each location s application must have a copy of addendum provided with application. If they are operating under the same Franchise Agreement, they only need one addendum. If each location utilizes a different franchise agreement, you must have the specific addendum for that version of the franchise agreement for which they are obtaining a loan. The Lender/CDC should ask if there is more than one version of this franchise concept and how/why it varies. 23 Q4: What does SBA review the agreement for during the Pre-App Review for 504? SBA reviews the agreement for eligibility purposes and to confirm that the SBA Addendum (or Temporary alternative documentation) is included. Further review may be required if SLPC has further questions resulting from info in CDC credit memo at time of full loan application. Q5: May I submit my 504 loan application to SLPC without submitting a Pre-App Review? No. SLPC will screen out any loan application identified as a franchise (or other agreement that meets the FTC definition of franchise) that has not been cleared through a Pre-Application Review. 24 8

28 Q6: Do the franchise review procedures apply to gas stations and Fuel Distribution/Dealer/Jobber/License Agreements? Yes. All agreements and relationships that are covered by the Petroleum Marketing Practices Act (PMPA), 15 U.S.C (e.g., gas stations), are included within the FTC definition of franchise and are subject to the new franchise procedures in SOP (I), including but not limited to requiring the SBA Addendum to Franchise Agreement (SBA Form 2462). A related issue to fuel agreements arises when the gas station includes a convenience store. If the convenience store is covered under the same agreement as the fuel sales, then only one Addendum will be required. If, however, there is a separate agreement covering the convenience store (or any additional franchise operation inside the convenience store), then a separate Addendum will need to be obtained for the fuel agreement and the agreement that governs the convenience store (and any other franchise inside the c-store) if they meet the FTC definition of Franchise. In all cases, if there are other documents the distributor/licensor/dealer requires the small business applicant to sign, the lender must review those documents to ensure compliance with all SBA Loan Program Requirements. 25 Q7: What about Non-Fuel Dealer/Distribution/Jobber/License Agreements? For distributor/license/dealer/other agreements and relationships that don t involve the sale of fuel, the Lender/CDC will have to review the agreement and any other documents the small business applicant is required to sign in order to determine if the agreement meets the FTC definition of a franchise. The agreement or relationship must meet all three elements in order to be deemed a franchise ; if the agreement or relationship does not meet all three elements of the definition, then it is not a franchise and is not subject to the new procedures. Q8: Are Area Development Agreements eligible? Area Development Agreements MAY be eligible. These agreements allow a specific franchisee to operate a number of franchises within a specified geographic area. They are not eligible if agreement allows the developer to use outside franchisees to open locations in their territory. (See guidance in franchise section of SOP (I), 7(a) page page 228 type of business, restrictions, etc.) Franchise Development Agreements aka Master Franchise Agreements are INELIGIBLE. These agreements are considered passive investments and/or inherently speculative. The Agreements provide geographic territory to grow more franchise units and developer s income consists of royalty payments from independently owned franchise units. 26 Q9: What if a Franchisor refuses to sign the SBA Addendum to Franchise Agreement (SBA Form 2462) or temporary alternative documentation? If the agreement meets the FTC definition of a franchise and the Franchisor refuses to execute the SBA Addendum to Franchise Agreement (SBA Form 2462), the loan is ineligible. If the Lender fails to obtain the executed Addendum to Franchise Agreement (or temporary alternative documentation) prior to disbursement of funds. Failure to obtain the executed documents may result in a denial of liability on the guaranty. If the CDC fails to obtain the executed Addendum to Franchise Agreement prior to closing, the 504 loan may not be closed or funded. If the Franchisor refuses to sign the SBA Addendum because they do not want to forgo their Right of First Refusal (ROFR): The Addendum does not prevent the franchisor from having the Right of First Refusal (ROFR). By signing, they agree only that they will only exercise such an option if the proposed transferee is not a current owner or family member of a current owner of the Franchisee. This means if two owners own a franchise and one owner wants to sell his/her shares to the other owner, the Franchisor will not exercise their ROFR to transfer complete ownership to the franchisor. The same conditions apply to transfers of ownership to family members of the owners, such as father to son, etc. 27 9

29 Q10: What language is required in the loan Authorization? SBA recognizes sometimes an addendum may not be executed prior to SBA s loan approval. In those cases SBA allows a Lender/CDC to submit the loan application without the executed addendum, provided the executed documents are obtained prior to closing a 504 loan. The updated language must be manually inserted into the Authorization Boilerplate. For CDCs, the SLPC will insert the following language in the 504 Debenture Authorization (unless PCLP). 7(a): Lender must obtain the executed Franchise Agreement, either (i) the SBA Addendum to Franchise Agreement (SBA Form 2462), or (ii) the Certification (SBA Form 2463) and SBA Negotiated Addendum, and all other documents the franchisor requires the franchisee to sign prior to any disbursement of Loan proceeds and retain in the loan file. Failure to obtain the executed documents may result in a denial of liability on the guaranty. 504: Franchise - CDC must obtain the executed Franchise Agreement, either (i) the SBA Addendum to Franchise Agreement (SBA From 2462), or (ii) the Certification (SBA Form 2463) and SBA Negotiated Addendum, and all other documents the franchisor requires the franchisee to sign. PCLP CDCs will have to insert the language in the Debenture Authorizations themselves. The language can be manually inserted into the prior to closing section of the 504 Authorization Boilerplate by clicking Edit and adding the language above. 28 Send questions on Franchise updates to temporary box: FranchiseFY2017@sba.gov 29 10