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

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

3. SBA 7A LOAN PROGRAM

4. 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

5. 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

6. 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

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

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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Franchise Offering/ Agreement:
Current process is outlined in SOP
Under SBA Notice 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
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).

17. 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

18. 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

19. 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

20. 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

21. 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__”

22. 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.

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

24. 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

25. 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

26. 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.

27. 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

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

29. SBA 504 Loan program

30. 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)

31. 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.”

32. 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

33. 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.

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

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

36. 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.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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!

42. QUESTIONS??

43. Scott Kennedy Hergenroeder, rega, ewing & Kennedy, llc 625 Smithfield street, 17th floor Pittsburgh, pa (412) Rebecca MacBlane Regional development funding corporation 3856 south water street Pittsburgh, pa (412)