504 Loan Closings

1. 504 Loan Closings From the District Office Perspective September 8, 2014Worcester, Massachusetts

2. 504 Loan Closings ATTORNEY PANEL: George A. Hewett, Davis, Malm & D’Agostine Mary Laura Russell, SBA MA District Counsel Mark S. O’Brien, SBA ME District Counsel Robert S. Welch, SBA NH District Counsel

3. OVERVIEW • Timing Is Everything • Common Document Errors • Best Practices • Wells Fargo & OCRM Issues

4. 504 Closings: Timing Is Everything Closing Responsibilities • The 504 Loan Closing involves the coordination typically of 3 separate loan closings: • Third Party Lender Loan • Interim Lender Loan • CDC Debenture Closing • This requires the coordination of bank counsel, CDC counsel and ultimately SBA counsel • Set realistic expectations

5. 504 Closings: Timing Is Everything Closing Responsibilities • 504 construction projects are turn key projects: SBA is a true “take out” lender, meaning that Projects must be complete before submission to SBA • Significant time may have elapsed between the initial Third Party Lender closings and the ultimate funding of the 504 Debenture • Submitting the 504 loan closing package for SBA review is subject to monthly District Deadlines for submission

6. 504 Closings: Timing Is Everything Closing Responsibilities • Construction issues: • Turn key: When Construction is complete, all Third Party Lender and Interim Loan funds must have been disbursed and a Permanent Occupancy Permit must be obtained. This is the typical and most common 504 project. • With SBA’s prior approval if portions of the project which represent a relatively minor portion of the total project, and it has been contracted for delivery at a specified price and date but cannot be installed or delivered prior to completion, the debenture may be sold under certain circumstances provided the proceeds authorized for said purposes are held in escrow by CDC attorney or bank to complete the Project components and an Occupancy Permit has been issued. Examples include parking lot and landscaping outstanding due to weather issues. • If a Temporary Certificate has been issued and SBA reviews and consents to said conditions the package may be submitted for funding.

7. 504 Closings: Timing Is EverythingCDC’s Responsibilities • 20 Year Debentures are funded monthly • 10 Year Debentures area funded every other month

8. 504 Closings: Timing Is EverythingSBA Deadlines: CDC’s Responsibilities • Notify District Office: • SBA Counsel in writing of planned debenture closings at least 30 days before the Field Office deadline for CDCs to submit closing packages. • 327: • Request from the SLPC all necessary modifications to the Authorization before submitting closing packages as far in advance of submitting the loan closing package as possible. • The CDC mustobtain SBA approval of all such issues before submitting the closing package to the field office. • Hold: • Failure to obtain prior SBA (Sacramento) approval requires the District Office to put the loan on “hold status”, CDC to submit the request to Sacramento with the “hold status” determination, Sacramento to review the matter and reach its determination – all of which result in delay and inability to review the closing package

9. 504 Closings: Timing Is EverythingSBA Deadlines: CDC’s Responsibilities • No Adverse Change: • There has been no unremedied substantial adverse change in the Borrower's (or Operating Company's) ability to repay the 504 loan since its submission of the loan application to SBA (“finding”). • All 504 loans except ALP and PCLP: • CDCs must provide its finding to the SLPC along with copies of the financial statements current within 120 days supporting that finding. • The CDC’s finding of no adverse change must be made no more than 14 calendar days prior to submission to the SLPC at the time the CDC is requesting that SLPC transmit the file to District Counsel for debenture closing. NB: If the debenture closing is not consummated in the month following the finding, a new finding of No Adverse Change AND request for transmission of the file including SLPC’s approval of the new finding to District Counsel is required.

10. 504 Closings: Timing Is EverythingSBA Deadlines: CDC Responsibilities • Request from Sacramento: • That each Authorization be transmitted by the SLPC to the field office for closing in time to meet the field office’s deadline for submission of loan closing packages. • CDCs must not request a transmission unless the debenture is ready for closing and sale during the month following the request. If an Authorization has not been received in the field office by its loan closing package submission deadline, SBA Counsel may hold over the package for the next month’s debenture sale • Submit to District Office: • Each closing package by the deadline established by SBA Counsel. CDCs may submit a closing package electronically, by facsimile or hard copy. SBA Counsel may hold late packages over for the next month’s debenture sale • Failure to make a funding cycle will require new documentation – new debenture funding date

11. 504 Closings: Timing Is EverythingSBA Deadlines: Impediments to Funding • Failure to notify Sacramento in a timely manner to submit Authorization to District Office by the District Office deadline. • No adverse change review not conducted and approved by Sacramento by District cut-off date (non ALP and non PCLP CDCs). • Late 327 actions after the District Office Cut off date. • If an Authorization has not been received in the field office by its loan closing package submission deadline, SBA Counsel may hold over the package for the next month’s debenture sale, which requires new dates on all documents. • Do not submit a loan closing package to SBA until Sacramento has approved the change of name, no adverse change or other 327 action. • Punch List items incomplete.

12. 504 Closings: Documentation ErrorsSBA Deadlines: CDC’s Responsibilities • Make sure you are using the most recent version of documents: • http://www.sba.gov/for-lenders • If there is any question, contact counsel • Opinion of CDC Counsel (Appendix D to the 504 Authorization Boilerplate) can be reached at this web site: • http://www.sba.gov/offices/headquarters/oca/resources/13049 • D504v2013.doc (5th down under File Name), (It is Appendix D of Authorization) • Evidence of lien priority on real estate and personal property collateral: • Title insurance • UCC Search • Copy version to your desktop

13. 504 Closings: Common Document Errors CDC’s Responsibilities • Discrepancies in Documents: • TP Lender Agreement: term, percentage and date don’t match among the following documents: • Servicing Agent Agreement • CDC Certification • Opinion of Counsel • Title Policy often lists date of document • Servicing Agent Agreement: • Third Party Lender Fee (no indication if it is to be withheld or attached) • Required information being left blank • See Handout: Servicing Agent Agreement (SBA Form 1505)

14. 504 Closings: Common Document Errors CDC’s Responsibilities • CDC Certification: • Required to be no more than 60 days prior to proposed Debenture Funding • Required to incorporate by reference the executed Third Party Lender Agreement • Required to incorporate by reference the executed Interim Lender Certification • Required to incorporate by reference the executed Borrower and Operating Company Certification • Certifies that the Project has been completed substantially in accordance with plans and specifications which formed the basis for the appraisal, • Other certifications • CDC Certification must not be dated before the above certifications • SBA Form 2101 (4-2014)

15. 504 Closings: Common Document Errors CDC’s Responsibilities • Opinion of Counsel: • Dated after the last 327 action • Dated not earlier than the required certifications • Options • Either list appropriate organizational documents upon which counsel relied if there is no opinion of Borrower’s/Guarantor’s Counsel, or • If there is an opinion of Borrower’s/Guarantor’s Counsel list the date of the Opinion • Confirm date is consistent with latest 327 action and the date the documents were executed • “Additional Conditions” section of the Authorization • Make sure standby agreements, life insurance, Permanent Certificate of Occupancy and other requirements of Authorization are included

16. 504 Closings: Common Document Errors CDC’s Responsibilities • Collateral Conditions - Authorization Requirements: • Second mortgage on Project Collateral • “Title insurance company must provide affirmative coverage to CDC and SBA over any such exceptions, affording reasonably adequate protection against material loss arising from such exceptions” • “In addition, the title insurance company must provide such endorsements as CDC or SBA deems necessary to protect CDC and SBA reasonably against material loss arising from any other exception” • Second Perfected Security Interest • Project Property • All collateral required by the Authorization

17. 504 Closings: Best Practices CDC’s Responsibilities • Issue: • What happens if the Third Party Lender takes additional collateral? • Current view of Sacramento is that, without prior approval by Sacramento, the CDC/SBA lien has to mirror the Third Party lien. • Third Party Lender Agreement (SBA Form 2287 (04-14)) states: If the Third Party Lender takes additional collateral as security for the Third Party Loan, in the case of liquidation, any proceeds received from such additional collateral must be applied to the Third Party Lender’s Loan prior to the proceeds from the liquidation of the Common Collateral held by the CDC/SBA and the Third Party Lender. If the additional collateral no longer exists at the time of liquidation, or has insufficient value to justify the cost of collection, then the Third Party Lender is not required to liquidate such collateral, provided the Third Party Lender notifies CDC/SBA. See: ¶ 6 of SBA Form 2287

18. 504 Closings: Best Practices • Opinion of Counsel: • Add paragraph regarding required insurance • Add paragraph regarding life insurance • Add paragraph regarding standby agreement • Address “Additional Conditions” • Add Trust language • Title Policy: • Add after mortgage to CDC, “assigned to the U.S. Small Business Administration by Assignment of Mortgage recorded with said Registry of Deeds in Book___, Page ___” • Add to Schedule B – Part I after description of Third Party Lender First Mortgage, “as affected by Third Party Lender Agreement recorded with said Registry of Deeds at Book___, Page ___” • Add after Interim Second Mortgage “(to be discharged upon funding of the Insured Mortgage)”

19. 504 Closings: Best Practices • UCC Best Practice: • Provide list of UCC filings against assets of EPC and OC/SBC • Identify assets pledged by obligor • Name the secured creditors • Provide a copy of the UCC documents pledging assets

20. 504 Closings: Wells Fargo Issues CDC’s Responsibilities • Loan Name:

21. 504 Closings: Wells Fargo Issues CDC’s Responsibilities • Common Document Errors: • Servicing Agent Agreement • Wrong routing information • Best Practice obtain in writing information from the Lender • Inconsistencies in dates (especially note date & SBA approval date) • Inconsistencies in loan and/or entity’s names and addresses • Payment of the Third Party Lender Fee: • Attached (Submitted with funding package) • Submitted under separate cover (not a good idea) • To be withheld (can create issues)

22. 504 Closings: Wells Fargo Issues CDC’s Responsibilities • Common Document Errors (continued): • ACH (Automatic Withdrawal) • Check that is attached does not match bank’s name • Incorrect W-9 information • Wrong version • Wrong information (i.e. address on W-9 does not match SAA address) • EIN number for entity /SSN number for individuals • Missing information • Check correct entity box

23. 504 Closings: OCRM Issues • OCRM Issues: • Improvement needed in documentation of completion of construction in accordance with Authorization • Improvement needed in documentation of proper use of Project Funds for stated Project purposes • CDC failed to obtain SBA assent and follow Escrow for Construction requirements • Need to obtain list of equipment at closing if equipment is included as collateral • CDC Certification: • CDC certifies that all project costs have been paid in full or all requirements relating to escrow closing have been fully satisfied (¶ 3) • CDC certifies that the project has been completed substantially in accordance with the plans and specifications which formed the basis for the appraisal used in the application (¶ 9)

24. SUMMARY • Timing is everything • Common Document Errors • Best Practices • OCR & Wells Fargo Issues • Communication with District Office Is Key

25. 504 Loan Closings QUESTIONS ?