Congratulations! The Lender and the Certified Development Corporation (“CDC”) have approved your SBA 504 Loan! With the assistance of the Lender and the CDC, you have navigated your way through the application process, answered many questions, provided all of the required documentation, and you have now received an approval for your 504 loan.

So…what’s next?

At this point in your transaction (also known as your “Project”), the Lender and the CDC will each typically engage a law firm to handle the closing of their respective loans in the Project. In many Projects, while not required, the same counsel will concurrently represent both the Lender and the CDC; however, this article is prepared through the perspective of counsel for the CDC.

Upon being engaged, the CDC’s counsel first obtains and performs a thorough review of both the CDC’s SBA 504 Loan approval documents (e.g., the SBA Authorization and the Sources and Uses provided by the CDC) and, if provided, the Lender’s Loan approval documents (e.g., the Loan Approval, the Credit Memo, and executed Loan Commitment Letter). The primary purpose in doing this review is for the CDC’s counsel to familiarize itself with the Project (including identifying any special circumstances such as unique collateral conditions, unusual borrower structure, and challenging leasehold conditions) and to assess whether there are any discrepancies between the CDC’s Project approval and the Lender’s Loan approval. For example, do the amounts of Lender’s loans match those approved in the SBA Authorization? Also, to what extent, if any, is the collateral required in the Lender’s loans different than what is required by the CDC/SBA? Issues such as these are best addressed and resolved quickly once identified; to do otherwise may result in delays, additional expenses, and a Project that may not be eligible for an SBA 504 Loan. It is also critical to learn early in the closing process if the borrower has counsel and, if so, to connect with such counsel, the closing agent and title insurance agent.

Simultaneous with the review of the Lender’s Loan approval and the CDC’s approval, the CDC’s counsel will prepare a comprehensive Closing Checklist of all pre-closing conditions, documents, and requirements. To be most effective, the Closing Checklist must be clear, concise, and delivered to all parties involved in the Project. This will enable all concerned to most effectively work together towards delivering the documentation needed to satisfy all pre-closing conditions. It is also a best practice to have periodic closing status calls among all critical parties and to distribute updated Closing Checklists among those parties to keep information flowing and to make the greatest progress towards closing the Project.

Generally speaking, the Closing Checklist will include pre-closing due diligence requirements regarding each borrower and each guarantor; real estate title status (i.e., title insurance commitments or title searches); code compliance and municipal lien searches for all real estate collateral; lease matters; bankruptcy, litigation, and judgment searches regarding each borrower and each guarantor; and lien searches on all other Project collateral. Of course, each Project is unique and the CDC’s counsel must fully know and understand the Project to prepare and discuss an accurate Closing Checklist.

Other essential pre-closing requirements that are included on a Closing Checklist are appraisal reports and environmental studies, insurance, entity formation, and governing documentation (each requiring the approval of the Lender, the CDC and the SBA); tax transcript verifications; flood determinations; and life insurance policy(ies) and assignment(s) thereof.

Upon satisfaction of all pre-closing conditions…meaning all Closing Checklist items have been completed and approved by the CDC and its counsel…the CDC’s counsel will prepare the SBA 504 Loan closing documents. At this time, the CDC’s counsel will also review some of the Lender’s principal loan closing documents (i.e., the Promissory Notes, Mortgages/Deeds of Trusts) to ensure that the Lender’s loan closing will be consistent and compliant with Lender’s financing as approved in the SBA Authorization; any deviation in Lender’s documents must be addressed and resolved to the satisfaction of CDC counsel before the SBA loan will close. Also, at this time, a Closing Statement for the SBA Loan may be prepared, or the closing costs of the SBA loan may be included in the Closing Statement prepared for the closing of the Project. The Closing Statement is an integral part of any 504 Loan closing as it provides the borrower a breakdown of the funds needed for the closing and assists in verifying the borrower’s satisfaction of its equity injection requirement for the Project (a topic we will discuss in a future FOCUS newsletter).

Once the aforementioned actions are completed, it is time to schedule the closing of the Project. At the closing, the Lender’s loan documents and the SBA loan documents are all signed (NOTE: if the loan is a construction loan, the SBA loan documents may be executed after completion of construction and issuance of an certificate of occupancy or certificate of completion, as applicable) and the Lender’s loans are funded.

So, this is the end of the 504 Loan closing process, right? Well…no. There’s actually much more for the CDC and its counsel to do to ensure the Project proceeds as quickly and properly as possible to debenture. Stay tuned for more on equity injection requirements and the debenture process in future FOCUS newsletters.