April 24, 2013

Best Practices: New SBA 504 Loan Document Certifications

by Janet M. Dery

On April 12, 2013, the U.S. Small Business Administration (“SBA”) released SBA Information Notice 5000-1273, which outlines the changes being made to the 504 loan closing process to reduce the number of documents to be reviewed by SBA counsel. In order to eliminate duplicative review of certain documents by both the Certified Development Company (“CDC”) and SBA counsel, the SBA has revised key loan documents to include and/or strengthen certain certifications that will be relied upon by the reviewing party.

The Third Party Lender Agreement (“TPLA”), the Interim Lender Certification (“ILC”) and the Borrower and Operating Company Certification (“BOCC”) will all include a new certification wherein the party executing the document acknowledges that any false statement made to the CDC may subject the party to criminal penalties under 18 U.S.C. §1001.   The new ILC and BOCC certifications also include language that is similar to language already contained in the “Accurate Information” section of the TPLA. With these additions, all parties involved in the 504 loan will acknowledge in writing that all information provided to the CDC is accurate to the best of its knowledge, that the signing party has not withheld any material information, and that the CDC and SBA are relying upon the information submitted by the signing party.

The CDC Certification (“CDCC”) has been revised to include a similar certification from the CDC to the SBA, and also to include certifications that since the date of Borrower’s application to CDC for the loan “there has been no: (a) Unremedied substantial adverse change in the financial condition of the Borrower or Operating Company; (b) Change in the ownership of Business or Operating Company (including the number and identity of the owners or their percentage of ownership), unless approved by SBA in writing; (c) Change in the form of business organization of the Borrower or Operating Company, unless approved by SBA in writing; and (d) Change in the operation or assets of Borrower and/or Operating Company, including the type of business or affiliation with other businesses, which would render it ineligible for SBA assistance.”

The section in the CDCC which addresses insurance has been revised to include a certification from the CDC that: (1) the hazard insurance is in the amount of full replacement cost or maximum insurance value of the property if full replacement cost is not available; (2) insurance contains a Mortgagee and/or Lender’s Loss Payable Clause (as applicable) which provides that any action or failure to act by the mortgagor/owner of the insured property will not invalidate the interest of the CDC and SBA; and (3) the policy or an endorsement provides for at least 10 days’ notice to CDC/SBA prior to cancellation.

Finally, to ensure these documents and the certifications are as current as possible, the SBA has revised the “Date” line in the text box on the first page of the ILC, BOCC, and CDCC, to “require that the certification be” and no more than 60 days prior to proposed Debenture funding”.

In addition to the above, the SBA has also revised (i) the ILC to include a 30 day deadline after receipt of net debenture proceeds to release any recorded lien instrument and (ii) the TPLA to clarify the parties loan/lien positions and treatment of Common Collateral (as defined in the TPLA), add certain notification requirements, and make the Liquidation provision requirements mandatory. Please note that CDCs are required to use these revised documents beginning with the August debenture submissions, but may choose to use them as soon as the June debenture submissions.

For more information on the 504 loan document or process revisions, contact Janet at or at (215) 542-7070.