The Paper Chase: Effective loan documentation and closing processes

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Presentation transcript:

The Paper Chase: Effective loan documentation and closing processes Presented by: Scott Kennedy Hergenroeder, Rega, Ewing & Kennedy, LLC Rebecca MacBlane Regional Development Funding Corporation

TOPICS WE’LL COVER TODAY: ∙SBA 7A Documentation & closing considerations ∙SBA 504 Documentation & closing considerations

SBA 7A LOAN PROGRAM

SBA Authorization: Change Letters: Review Carefully Check Note repayment terms Check names Check collateral Check equity Check use of proceeds Collect and submit Loan Fee timely Change Letters: If Authorization is incorrect, prepare change letter and send If you have any doubt about what is in the Authorization, do a change letter

1050/Use of Proceeds with copies of Checks: Only get one form signed MUST HAVE AN AUDIT TRAIL Must comply with use of proceeds in Authorization Must match disbursements with use within 10% Watch out for EPC/OC. No Working Capital

Mortgagee Title Insurance Policy: Have title commitment reviewed by experienced person Less is more, the more exceptions the less coverage Watch out for: Use covenants Existing liens Some standard Endorsements Oil and Gas

Survey: Should have with new construction Look for encroachments Look for access

Evidence of balance due on first mortgage: Verify balance Determine if Open End Watch for HELOC Future Advances

Pre-Closing UCC and Other Searches: Check all jurisdictions Check Bankruptcy Check Judgments Credit Report will have Order right away to avoid problems POST CLOSING UCC SEARCH Verify Priority Good to pre-file

UCC-1 Financing Statements: Be certain of name Be certain of where to file Watch out for collateral that must be in possession of Secured Party (stocks) Process filing takes 7-10 business days Pre-file

Pledge of Stock: Control Agreement: Stock Power: Similar to Security Agreement Sometimes done if business is licensed (liquor license) May need to possess stock Control Agreement: Need for uncertificated stocks, investment accounts, etc. Only way to get to the Collateral and perfect security interest Stock Power: Done with Stock Certificates Sign in blank

Assign. of Tenant’s Interest: Lease: Must match term of Loan If you don’t care do a change letter because Authorization requires the term of the lease to be as long as the loan May include renewal options as long as tenant can exercise unilaterally Limit rent to debt service, utilities, taxes & maintenance Assign. of Tenant’s Interest: Rare, but sometimes required & difficult to get May not want it If proceeds are used for leasehold improvements may have to get

Landlord Waiver: Subordinate Landlord lien to Bank lien Must be able to cure default, so need notice of default and opportunity to cure Must have access to collateral Problem if you don’t get it

Liquor License: A license is a privilege In Pennsylvania you can take security interest but subject to Liquor Control Board You can get interest in the ability to transfer General Intangible under UCC-1; someone else may have a lien already Should be mentioned in both the Security Agreement and the UCC-1 If the business closes down, you may want to remove the license

Liquor License Power of Attorney: Good to have so that you can work with Liquor Control Board and taxing authorities, Pennsylvania Department of Revenue Allows lender to execute transfer documents and fill out forms Obtain separate document authorizing Lender to use Borrower/Licensee’s account and password

Franchise Offering/ Agreement: Current process is outlined in SOP Under SBA Notice 5000-17009 Lenders and CDCs will no longer have to review franchise or other brand documentation for affiliation or eligibility. The SBA Franchise Directory (the “Directory”) on its website of all franchise and other brands reviewed by SBA that are eligible for SBA financial assistance. The Directory includes only those brands that SBA has determined are eligible. If applicant’s brand meets the FTC Definition of a franchise, it must be on the Directory in order to obtain SBA financing. The Directory will be maintained on SBA’s website at www.sba.gov/document/support--sba-franchise-directory Whether the brand meets the FTC definition of a franchise; An SBA Franchise Identifier Code, if applicable (a code will only be issued of the agreement meets the FTC definition of a franchise); Whether an addendum to the franchise agreement is needed and, if so, whether the franchisor will use the SBA Addendum to Franchise Agreement (SBA Form 2462) or an SBA Negotiated Addendum (with respect to an SBA Negotiated Addendum, the Directory will list the addendum most recently negotiated with SBA, which will not be earlier than 2015); and Whether there are additional issues the SBA Lender must consider with respect to the brand (e.g., documentation that the business will be open to all, review of any third party management agreement to ensure Applicant is not a passive business or affiliated with the management company).

Franchise Offering/ Agreement: Be sure you have all the Franchise Documents and all signed Franchisor should certify that these are all the documents Careful! May render Loan ineligible! curing default: Requires notice of default and opportunity to cure Defer franchise fees if Loan is in default (hard to get) Access to Franchisor’s books as they pertain to Borrower

Certificate of Insurance for real & personal property listing Make sure in place Change Endorsement Copy of Declarations page Mortgagee/Lender Loss Payee Workers Compensation Insurance: Must have if they have employees

Collateral Assignment of Life Insurance: Be certain Insured is correct Owner may be other than insured Copy of the policy Term long enough for loan? Be sure in correct amount Collateral Assignment of Life Insurance: Must not be assigned to anyone else Must be correct Insured and Amount Must be signed by OWNER of policy Must be assigned as Collateral, NOT CHANGE IN BENEFICIARY

Partnership Authorization and Partnership Agreement: Check all parties Be sure allow for Confession of Judgment whether a GP or an LP If not all Partners must sign authority of one Partner to sign Confession of Judgment

Standby Creditor’s Agreement (SBA Form 155): Get copy of Standby Note Compare to be sure it is correct Be sure you have payee on Note as Standby Creditor Standby Note with Endorsement: If no Note, tell them to draft one Have Note endorsed as follows: “This Note is subject to the terms and conditions of a Standby Creditor’s agreement between Payee and ____________ (Bank) dated the _____ day of _____________, 20__”

Evidence of Equity: Critical I prefer an Affidavit One of the first things looked at Cash is King In kind must be supported by appraisal (I would be sure SBA agrees) Careful about where it comes from, there are many specific rules about this HUD-1 Settlement Sheet: Good way to track use of proceeds.

Compliance with Bulk Sale Provisions: Purchase of more than 51% of assets Pennsylvania Department of Revenue clearance Escrow/Indemnification Verify payment of seller taxes

Complete Equipment List: Important as this is required by Authorization under collateral where security interest is listed Should have list of all equipment All equipment over the value of $5,000 should have a complete description with serial number Bill of Sale: Same as a Deed for personal property

Business Licenses, Permits, EIN, Certificate of Occupancy: Must have EIN If Borrower requires a license, need a copy (attorney, barber, restaurant with liquor license, dentist, doctor, etc.) Pennsylvania contractors are required to have permits

Non-Compete Agreement: Good to have in a business acquisition Be sure the principal or principals of the seller are bound. No good if seller is a corporation and person that can compete is an individual. They are not bound.

Construction: Fixed Price Bid Protects Lender and Borrower Must match use of proceeds Contractor’s Builders Risk Insurance Collateral Assignment of Construction Docs (need this if you have to complete works) Earthquake Compliance: for new construction only

Occupancy Certificate: Post closing Very important for new construction and leasehold improvements

SBA 504 Loan program

COMPONENTS OF AN SBA 504 project: Bank Loan (a.k.a. Third Party Lender or TPL) SBA Loan (administered by a Certified Development Company or CDC) Borrower Equity (cash, equity in assets or subordinated debt)

eligible SBA 504 projects: Building acquisition Building renovation Land acquisition and ground-up construction Acquisition and installation of substantial machinery & equipment Debt refinance of real estate and/or machinery & equipment and the funding of “eligible business expenses.”

SBA 504 Approval Process: The SBA 504 Loan Program has a 3-Pronged approval process. When you’ve received all 3 approvals, you are clear to close: Loan approval via an Authorization for Debenture Guarantee Appraisal approval Environmental approval

Closing Considerations: If the TPL Loans are fully disbursed at closing, then the SBA 504 loan may close simultaneously. Funding will occur within 45 – 60 days If the TPL Loans have multiple draws, then the SBA 504 loan will not close and fund until the TPL Loans are fully disbursed. SBA 504 Loan Authorizations have a term of 48 months for the “Regular” 504 Program and 6 months for the SBA 504 Debt Refinance Program. Extensions MAY be approved by the SBA for good cause.

What are the two most important concerns in closing and disbursing an sba 504 loan? You guessed it!! Use of proceeds & evidence of equity

Use of proceeds: “Use of Proceeds” must match the “Project Costs” outlined on page 2 of the Authorization:

Use of proceeds, cont.: Prior to 504 closing, the CDC must collect and review the Bank disbursement documentation, so it is in your best interest as a TPL to keep good records and follow the Project Costs outlined in the SBA Authorization. If the Bank disbursement records don’t match the Project Costs in the SBA Authorization, the CDC will have to prepare a Change Letter or 327 Action to modify the loan approval. It is strongly recommended that you contact your CDC PRIOR to any modifications you make to the predetermined Use of Proceeds to confirm eligibility.

Borrower equity verification: May be in cash. May be in the form of equity in land & buildings and machinery & equipment (verified by the appraisal). May be subordinated debt, but those terms and conditions must be reviewed and approved prior to closing. Evidence is required and can be in the form of settlement sheets and/or invoices and cancelled checks. No “look-back” period on costs incurred prior to SBA 504 application; must be directly attributable to the project.

TPL Documentation considerations: May use conventional loan documents, but the Third Party Lender Agreement requires the following: No Open-Ended features or Future Advances. No Early Call or Demand features. No Cross-Collateralization or Cross-Default. TPL Loan term must be at ≥ 7 years for a 10 year debenture and ≥ 10 years for a 20 year debenture.

Construction loans: An “As Completed” appraisal will be required at the time of application. An Appraisal Recertification may be required prior to closing. If the project includes “Substantial” renovations, defined as 1/3 of the purchase price or fair market value, an Appraisal Recertification is required. The Appraiser, General Contractor, Project Architect or Construction Management Firm must state that the building was constructed with only minor deviations (if any) from the original plans and specs upon which the original value was based.

closing considerations: Immediately prior to closing, the CDC is required to confirm that No Adverse Change has occurred in the business since the loan was originally approved. An analysis will be performed by the CDC which will require updated signed tax returns and interim financial statements using statements current within 120 days. If the business is a start-up, the CDC will compare actual financial performance to the borrower’s original proforma. If cashflow is inadequate to support the debt, updated financial projections may be required to evidence the borrower’s ability make debt service payments.

Final words . . . . BENEFITS TO BORROWERS Low down payment Longer terms and a low fixed interest rate BENEFITS TO THE BANK Risk mitigation by providing a low Loan-To-Value Creates a competitive advantage and the attractive rate/terms might help you win the deal  If you develop a close relationship with your CDC and maintain good lines of communication, your project will be successful!

QUESTIONS??

Scott Kennedy Hergenroeder, rega, ewing & Kennedy, llc 625 Smithfield street, 17th floor Pittsburgh, pa 15222 (412) 208-3310 skennedy@hrslaw.com Rebecca MacBlane Regional development funding corporation 3856 south water street Pittsburgh, pa 15203 (412) 471-1030 rmacblane@rdfc.net