the new sba sop 50 10 5 j by lerchearly 2017 12-06 2776434 1

The New SBA SOP 50 10 5 (J)

© 2017 Lerch, Early & Brewer 1

Presented by;Alison Rind, Arnold Spevack,

Michael Smith & Stephanie SmithDecember 6, 2017


[Title of Presentation]The New SBA SOP 50 10 5 (J)


• Equity injection• EPC/OC requirements • Franchises• Credit elsewhere• Some miscellaneous changes

Overview


Equity Injection(SOP pgs 174‐175)




New Minimum Requirements• Change of Ownership• Start‐up Business• Reasons

–CFR requires “sufficient equity to operate on a sound financial basis” (13 CFR 102.150)

–Business owner commitment to the business–Reduces risks to lender and lowers debt ratios



New Minimum Requirements – con’t• Credit Memo must include a detailed discussion on required equity and adequacy of equity

• Lenders must determine if the equity and pro‐forma debt‐to‐worth are acceptable based on:–Experience of management–Competition in the marketplace– Type of business



Change of Ownership• New Owner – 10% of total project cost (SBA to clarify it has the means purchase price)

• Sale between existing owners‐–Pro forma equity position after change of ownership must be at least 10% of total assets

–Otherwise remaining owner to contribute equity to result in at least a 10% net worth



Change of Ownership ‐ con't• Seller Debt not equity unless on full standby for life of loan and does not exceed one‐half of equity requirement

• Lender may require more than 10% (10% is merely a minimum requirement), in some cases, prudent lending may require more than a 10% injection




Start‐up Business• At least 10% of total project cost necessary to operate on a sound financial basis




What about other loan purposes?• SBA expects lenders to consider requiring equity for all loans, thus your credit approval should always include a discussion on equity analysis and requirements




No option to submit non‐delegated to avoid the 10% injection requirement



EPC/OC Requirements(SOP pgs 115‐118)




EPC/OC Requirements• Revised Rule now includes “finance a change of ownership between the existing owners of the EPC.”

• Clarified that when the OC is a co‐borrower, proceeds may also be used for working capital or purchase of intangible assets for the OC’s use




EPC/OC Requirements – con’t• EPC must have owned the real estate for at least 3 years in order to qualify for financing a change of ownership

• Only affects change of ownership between existing owners EPC owner cannot transfer 100% interest to a new owner

• EPC selling owner may not remain an owner in the OC (payment to an Associate)



Lease• Rent payments cannot exceed loan payments plus direct expenses (insurance, taxes, maintenance)

• If loan is variable rate, base rent should not be fixed• Must be as long as Loan Term• Must be subordinate to SBA Loan• EPC to provide an assignment of rents




Spouses• When combined ownership of both spouses in the EPC or OC is 20%, both must personally guarantee loan in full

• Eliminated 5% rule (spouse had to own at least 5%)




Size Determination under EPC/OC Rules Corrected• EPC may not engage in other activities except to lease the asset/property to the OC for the OC’s use

• Qualifying trust EPC may engage in other activities as authorized by its trust document




Guaranties• Added that lenders may require others to guaranty the loan (not just 20% or more owners)




504 Loans• If the EPC owns any assets in addition to the commercial real estate, proceeds may not be used to finance a change of ownership between existing owners of an EPC unless:– Additional assets owned by the EPC are directly related to the real estate or become eligible long‐term fixed assets

– The amount attributable to the additional assets is de minimis– Additional assets are excluded from the project cost




Space Occupancy• Now allows common areas as applicant‐occupied



Franchises(SOP pgs 90‐97)




Franchise Directory• Identifies all franchises and other brands reviewed by SBA that are eligible for SBA financing

• Whether a Franchise must be on Directory to be eligible• Will include brands that are not franchises but are otherwise eligible for SBA financing (i.e., Fed Ex)




Franchise Directory – con’t• Located at www.sba.gov/for‐lenders• Will identify whether SBA negotiated SBA addendum is available or if is required

• SOP contains procedure to add brands to SBA Franchise Registry




Franchise Directory – con’t• Annual certification required from franchisors if there is a negotiated addendum and no addendum is required (SBA Form 2464) or if the franchise is using the SBA Addendum (SBA Form 2462)

• Lenders must document in its file that it reviewed the Directory and identified the name of the franchise and SBA Franchisor identifier code




Franchise Directory – con’t• If brand is not on the Directory and lender determines it does not meet the FTC definition of franchise, SBA will review at time of purchase



Credit Elsewhere(SOP pgs 97‐98)




Include in Credit Memo• Determine that some or all of the loan not available from Applicant, including liquidity of owners, spouses, guarantors, Associates or conventional lenders or other sources of credit including the processing lender




Include in Credit Memo – con’t• Discussion of factors that demonstrate weakness in credit, which cannot include:– Compliance with CRE requirements– Liquidity of lender deposit and sale of guaranteed portion on secondary makes

– Exceed lending limit



Some Miscellaneous Changes




Taxes (SOP pg 123)• Expanded definition• Loan proceeds may not be used to pay

– Federal, state or local– Payroll taxes– Sales taxes– Similar taxes that are required to be collected and held in trust for federal, state or local government entity




Affiliation Based on Management (SOP pgs 89‐90, 92)• Clarifies when management agreement eligibility will be determined by the degree of the applicant owner’s oversight and control– If agreement gives 3rd party management company sole discretion to manage the operations of the business with no owner oversight, then the loan is ineligible




Affiliation Based on Management – con’t– In determining size, must look at combined size when management company has sole discretion over the business with minimal oversight by the owner

–There is no affiliation if there is meaningful oversight by the business owner of the management company’s activities




7(a) Maturity (SOP pgs 141‐145)• Real Estate may go beyond 25 years for period reasonably necessary to complete construction or improvements

• Leasehold improvements – maximum maturity is 10 years unless there is significant build‐out




7(a) Maturity ‐ con't• Mixed purpose loans

–Use maturity up to the maximum for asset class comprising 51% or more of or at proceeds (not just largest percentage); or

–Blended maturity




SBA Express Loans (SOP pgs 143‐144)• Extended maturity up to 10 years• Added requirement for term out• May revolve for no more than 60 months• Term out period must be at least as long as draw period• Express LOC’s must also have term out period – maximum maturity of 7 years

• Increases only allowed during the draw period




Refinancing under SBA Express (SOP pg 127)• Adds to the circumstances where an Express loan may be used to refinance an SBA loan‐ if applicant needs additional financing and the existing lender is unwilling to increase or make a new loan and the new loan will meet the 10% improvement to debt service requirement

• Lender may not refinance its own SBA debt under SBA Express




Use of Agents (SOP pgs 164‐169)• SBA expects lenders to exercise due diligence and prudent oversight of their third party vendors, including LSPs and other loan agents

• SBA will review evidence of such due diligence and oversight when conducting its oversight activities




Use of Agents ‐ con't• The District Offices will send all LSP agreements to LGPC to ensure compliance with the SBA loan program requirements and lenders must provide any amendments to the LSP Agreements to the LGPC for review and approval

• LSP Agreement may not contain a power of attorney allowing the LSP to act on behalf of the lender




Use of Agents ‐ con't• If the LSP handles payments, the account must still be in the name of the lender, although the LSP may be granted access to the account and LSPs cannot co‐mingle funds of different lenders




Guaranties• Eliminated 5% Rule for spouses ‐If combined ownership is 20% then both must fully guaranty

• Reminder added that when deemed necessary for credit or other reasons Lender may require guaranties of individuals (full or limited) without regard to ownership interest




Examples• Minority owner critical to operation of business• Entity that manages the daily operations through a management company




Collateral (SOP pgs 187‐188)• Refinance ‐May be able to substitute collateral of comparable value and life (instead of taking some collateral) and may also release collateral if loan is over collateralized

• Small loans‐ may forgo business real estate lien if there is less than 25% equity at FMV and may limit lien to loan amount




Collateral ‐ con't• Loans over $350K‐may forgo liens on all real estate if less than 25% equity at FMV

• Lowered value assigned to unimproved land to 50% (instead of 85%)

• FF&E can be valued at 10% of Net Book Value or appraised value




Deed Restrictions (SOP pg 186)• Added note that certain restrictions intended to protect the health and safety of occupants may be acceptable




Immigration Status (SOP pgs 110‐115)• Added information regarding different immigration statuses assigned




Eligibility (SOP pg 123)• Added as an ineligible purpose a loan to an applicant for the benefit of an ineligible affiliate business




Refinancing (SOP pgs 125‐126)• Added the requirement that the lender must cite the reasons why the existing loan no longer meets the needs of the application and added that improving the lien position cannot be the only reason

• Changed what the written analysis needs to include




Combined 504/7a Loans (SOP pg 140)• Order of application determines maximum loan and guaranty amount available

• Always process the 7(a) loan first to maximize the guaranty




Clarification on Credit Analysis Requirements (SOP pgs 171‐183)• Projections must show positive cash flow within 2 years AND

• Global debt service coverage ratio of 1:1 or better




Revisions to export loans (throughout the SOP)




Change of Ownership• Revised language on seller staying on by clarifying that a seller may not remain as an employee who manages daily operations (i.e., overseeing a department or a division, not a clerical position)

• Also added‐ for ESOPs where a controlling interest (51% or more) is acquired, seller may stay on as an owner, officer, director, stockholder or key employee but must guaranty the loan



Questions?



Thank You!




About the Presenters


Alison W. RindCommercial Lending and

Real Estate Attorney

T 301-657-0750 F 301-347-1527

[email protected]

Arnold D. SpevackCommercial Lending and


T 301-657-0749 F 301-347-1528

[email protected]

Michael D. SmithCommercial Lending and


T 301-657-0166 F 301-347-1529

[email protected]

Stephanie M. SmithCommercial Lending and


T 301-907-2802 F 301-347-1791

[email protected]

This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.