The July 2020 version of THE FOCUS, The Closing of an SBA 504 Loan (Part 1), covered some very important elements and considerations regarding how to prepare for and close an SBA 504 loan. That article discussed several of the most important parts of the pre-closing and closing process concerning the Term Loan and the Interim Loan, as well as the SBA 504 loan.

This article covers the procedure of submitting an SBA 504 loan file to the SBA for approval. Once the submitted file is approved by the SBA, the 504 loan will be purchased by private investors through the sale of SBA 504 loan debt. This debt is what’s known as a debenture. Each debenture is guaranteed by the SBA, which makes it attractive and available to investors. Each month, debentures issued nationwide are pooled and sold to investors. As the sale of the debenture is what funds the 504 loan and sets the borrower’s payment terms for the 504 loan, it is imperative that each 504 loan submission is completed properly and timely.

So, let’s pick things up with what happens next to complete the closing of an SBA 504 Loan: The Debenture Process.

Preparing a 504 loan file for submission to the SBA (“File Submission”) is a process totally separate from the closing. Of critical importance at the time of File Submission is that the Term Loan, the Interim Loan, and the SBA loan all match precisely what is permitted and required in the SBA Authorization issued with regard to the subject 504 SBA loan transaction (“Project).

In general terms, once the SBA loan documents are executed, the Certified Development Company (“CDC”) and its counsel need to determine what issues must be resolved, and what documentation must be provided, in order to proceed with File Submission. In other words, to get ready for File Submission, the CDC and its counsel often need to acquire items that were not, or could not, be provided prior to the closing. For example, a business tax receipt from the appropriate city and/or county is not available until the borrower can or does occupy and/or operate from the Project’s real property. As another example, a required life insurance policy may not be received and properly assigned until after the closing of the Term Loan and Interim Loan.

Other pre-File Submission matters and considerations include:

• Obtaining updated financial information (e.g., filed tax returns, current profit and loss and balance sheet) to verify that borrower’s financial condition remains unchanged.
• Approval of franchise documentation, if applicable.
• When a Project involves construction (i.e., improvements of an existing building or the construction of the building itself):
  • The CDC will need copies of all draws and supporting documentation from the lender. The CDC is required to verify that the use of the loan proceeds complies with the allocations provided therefor in the SBA Authorization.
  • If the Project involves ground up construction, an “As Built ALTA Survey”, properly certified, is required.
  • All title issues must be resolved (e.g., Notices of Commencement need to be terminated and all Claims of Lien need to be satisfied).
  • All real estate taxes must be paid current.
  • If equipment was purchased as part of the Project, the SBA requires an equipment list for all assets purchased with loan proceeds (such list should include a serial number for each item valued over $5,000).
• Acquiring a copy of the recorded Warranty Deed (if a property was purchased) and each recorded mortgage or deed of trust, as applicable, are needed to submit a file.
• Need to verify with lender that all payments are current on each of the Term Loan and the Interim Loan.
• Depending on when the SBA loan documents were executed, there may be a few date-sensitive documents that need to be re-executed [e.g., The Borrower and Operating Company Certification (signed by the Borrower and the Operating Company) and the Interim Lender Certification (signed by the Lender) are each required to be dated within sixty (60) days of the File Submission].
• Is the Lender’s Interim Loan matured or will it mature prior to the debenture funding? If so, it must be extended or renewed as the Interim Loan must not mature earlier than the debenture funding.

When all pre-File Submission matters have been resolved to the satisfaction of the CDC and its counsel, File Submission can properly occur. It is important to note that a File Submission is reviewed by applicable SBA District Counsel, who will assess whether a 504 file has satisfied the SBA’s debenture-submission requirements so that the 504 loan can be sold and the debenture issued. To the extent that SBA District Counsel determines that any SBA 504 loan requirements have not been met, the CDC and its counsel must address any issues and work with borrower and third parties to resolve them.

The debenture process is completed when the debenture is sold and the proceeds of that sale are used to pay off  the Interim Loan, at which time the satisfaction of mortgage or deed of trust (as applicable) securing the Interim Loan is recorded. It is important to note that, in Florida, proceeds of the debenture sale are often used to pay down the Interim Loan, at which time the mortgage securing the Interim Loan is assigned to the CDC, then assigned by the CDC to the SBA, and any required title insurance policy endorsements regarding such assignments are issued.

Upon completion of the debenture sale, the CDC will advise the borrower of the of the interest rate, prepayment penalty and other loan and payment details regarding the borrower’s 504 loan.