http://www.mortgagebankers.org/tools/FullStory.aspx?ArticleId=22265

After much anticipation, on February 17, 2011, the Small Business Administration announced the details of the 504 Debt Refinancing program.  While the use of the program is meant to help refinance loans that may be having a difficult time being refinanced by traditional lenders, there is an initial restriction limiting eligible loans to those CRE loans that are due to expire on or before December 31, 2012.  Any loans expiring after this will not initially be eligible for the program.  Some of the other highlights are:

• The loan being refinanced must be:
  • Current, without payment deferral or more than 30 days past due, for one year prior to date of application;
  • Incurred not less than two years prior to application;
  • Borrower must have been in business two years prior to application;
  • Substantially all (85%) or more of the proceeds of the loan being refinanced must have been used for SBA 504 eligible purposes;
  • Maturity must be on or before December 31, 2012.
• The loan structure must be:
  • First mortgage - not less than 50%;
  • SBA 504 Loan - not more than 40%;
  • Borrowers equity - not less than 10% (may be satisfied by the project property or other fixed assets acceptable to SBA as collateral);
  • Loan may not exceed the lesser of 90% of the fair market value of the fixed assets securing the loan or the debt being refinanced; and
  • No jobs creation requirement.
• Other noteworthy items: 
  • If the amount of refinance is not sufficient to repay debt, lender may 1) forgive the balance; 2) accept payment from the borrower for all or a portion of the deficiency; or 3) accept a new note which will be subordinate to the liens securing the refinance and a three-year standby requirement; and
  • No refinance of loans which are currently part of an existing SBA 504 Project or are subject to an existing federal guaranty.

We have had numerous conversations with the SBA, SBA lenders and CDCs and are happy to assist with questions or concerns.

504DebtRefi - SBA Template.pptx (191.13 kb)

Case-shiller seems to think so...I would be curious as to whether it will and what this means for the commercial real estate market...my feeling is the world still revolves around spending.  If people are not able to sell their home or feel like it is valued more than their mortgage, it will continue to curtail jobs, retail and commercial real estate.  There are many thoughts out there so only time will tell.  But with less commercial real estate changing hands, less environmental risk management typically takes place also.

http://www.dsnews.com/articles/sp-case-shiller-index-points-to-double-dip-in-home-prices-2011-01-25

I recently attended a local real estate seminar that was intended to explain the state of the market from lenders' points of view.  It consisted of a panel with the following participants:  Citibank, Farmington Bank, CB Richard Ellis, Freddie Mac and and insurance company lender, HIMCO.  This blog is just to highlight some of the major points raised...feel free to comment.

• Good deals still have large demand;
• CMBS is slowly on the rise - cautious right now but clearly on its way back;
• Rates are making the spreads tough for real estate lenders;
• Farmington Bank (the only community bank involved) actually grew by $600M over the past 2 years;
• Freddie Mac noted much more activity on the sales side this year;
• There is now an increased focus on secondary and tertiary cities due to the overabundance of bidders in MSA's;
• CMBS deals are much lower leveraged than previously.  Most recent CMBS deal was only 55% leveraged.
• According to CBRE, the multifamily biz is booming, especially since debt is available (primarily via Freddie & Fannie);
• The debt/yield ratio is quickly becoming the new LTV for lenders;
• The lenders were actually surprised that more bankruptcies have not occurred over the past 2 years;
• FDIC is now requiring lenders to maintain a 5% piece into the CMBS deals that they are participating in;
• Freddie Mac is currently underwriting/funding 90% of all single family deals and 80% of all multifamily deals nationwide.
• There are currently 18 CMBS players in the market today, although only 3 or 4 have executed deals this year.

For many, this is new news.  For many, this is nothing new.  Either way, I wanted to share it with you all.  While the market is slowly coming back, it is being funded via lenders who want to do deals but the deals just haven't made sense in many ways.  I will keep you posted in my discussions.

This is an interesting article describing how Sam Zell states that the government has inadvertently helped banks not get rid of their distressed assets by keeping interest rates so low. 

http://oakstonecompany.wordpress.com/2010/09/20/zell-wave-of-distressed-assets-wont-come/

Hot off the presses, the US Small Business Administration has updated its Standard Operating Procedures (SOP 50 10 5(c)) for lenders and CDC's using the 7A and 504 programs.  There are several changes that have been applied to the new SOP which are noted below.  However, much like previous versions, the same policies apply to both lenders and CDC's.  Once I review the SOP in its entirety, I will post more about the SOP and its intentions.

As someone who has been very involved with the development and implementation of this new way of doing business at both former employers, as well as with ORMS, it is very satisfying to see many of the suggestions that we made be put into effect.  For now, the major changes appear to be:

• An easy one, the new SOP changed from SOP 50 10(B) to SOP 50 10 5(c).    It goes into effect on 10/1/10.
• In the past, a questionnaire that revealed potential environmental issues was required to be bumped up to a Transaction Screen.  Now, it is only requiring an RSRA (Records Search with Risk Assessment) to be conducted as the next step.  In essence, SBA has eliminated the Transaction Screen (TSA) as a form of due diligence under its current SOP.
• If an escrow is being used, the source of the escrow funds cannot be the SBA loan proceeds;
• However, escrowed funds may be used for remediation but any remaining funds cannot be released until a "closure letter" or "no further action" letter is received or when all monitoring wells have been decommissioned;
• The requirement for a Phase I for gas stations and dry cleaners to be completed by a Professional Engineer or Professional Geologist has been removed. 
• However, Phase II ESA's must still be completed by a PE or PG with 3 years of relevant full time experience.
• There was also a significant clause removed regarding groundwater contamination coming from a neighboring property.  The lender/CDC no longer has to demonstrate that the contamination has not caused significant damage to the collateral value and marketability of the Property.
• Under Appendix 4, NAICS Code 8123, Laundry and Dry Cleaning Facilities, it now states if dry cleaning operations have ever existed on site...
• The requirement of what type of testing is required for tanks and lines for Gas Stations has been removed and left "The Environmental Investigation for all Gas Station Loans must include testing of all USTs, lines and related equipment by an independent contractor using a methodology acceptable to the Governmental Entity with oversight authority." to stand on its own and leave the testing method up to the PE/PG. 

This is what we have so far.  We have been getting many inquiries about the SOP and ORMS is happy to assist with the environmental risk areas in any way possible.

SBA 5010(c).pdf (2.96 mb)

For the majority of my career I have been helping companies develop and manage risk management policies and procedures.  These companies include banks, insurance companies, and Fortune 500 companies.  I have done this from both consultant perspective, as well as by developing products to try to encourage more due diligence by lenders specifically.  However, until recently, the economy had been so good, that environmental risk management was often an afterthought and was just a "check-box" in the entire risk management process.  In addition, there were very few companies/individuals that were offering any consultation/assistance to companies to develop and implement policies for companies.   

However, we at ORMS are hearing from more and more clients that they are unhappy with their existing environmental policies and need help with them from an expert that has been in the field and that has real life experience in providing this type of service.  I will use lenders as our first example.  We have been hearing from lenders nationwide that they need a better way to manage their risk.  While they haven't run into a lot of issues over the past years, they are now facing issues on their loans that received very limited due diligence on the front end.  In fact, many have used what is often referred to as "file filler" due diligence to give the impression that due diligence was completed...even though many users aren't even aware of how to interpret the information.  

The good news is that many of them have begun to consider this and many have put "stop-gap" measures to try to manage their risks on holes in their policies.  However, many of their policies are very inconsistent and have gaps in both procedures, and more importantly, knowledge with what to do with the information that they get. 

The key to effective risk management is not just looking at white papers and articles (it helps of course), but actually working with experts with real world experience and consulting. In addition, if the proper policies are designed and implemented, the risk management process actually gets easier because the entire organization tends to communicate the details to each other regularly which avoids surprises.  So, even though you might be adding a step to the process, putting a good policy and procedures in place actually reduces risk, time and cost for lenders.  And if you can work with individuals that have "Been there. Done that.", you can feel more comfortable that they have the expertise to provide your organization with experience and credibility.   

I have been reading quite a bit regarding the economy lately.  Wow...is that depressing.  Double dip recession, gulf oil spill, commercial real estate collapse, unemployment issues, small business lending down, record high debt, etc.  While I do not like to dwell on the negative, those are a couple of the not so fun phrases/concepts that I came across.

Understandably, I think the general feeling in the press and within many of our peers seems so negative that it is tough to be positive.  However, learning more about our clients (both current and prospective), developing more strategic partnerships and trying to assist all of these folks manage through these tougher times in the most efficient and cost effective manner possible has proven very beneficial.  We have been actively helping lenders, environmental consultants, and many other risk management professionals explore and develop new processes, solutions and strategies to best react to this economic time.

In many ways, since companies are often resistant to hiring due to the uncertainties in the economy, ORMS' business model has been received quite favorably by allowing for expertise and industry knowledge without the long term capital investment.  We have so many great partners and relationships in the industry, it has allowed us to match the right solutions to our clients which helps generate trust and deeper relationships.  This has included sales, marketing and other strategic consulting, as well as traditional risk management programs.  It has also resulted in many more opportunities for us which we are quite grateful for.  We are trying to make the old adage "Making Lemonade out of Lemons" for both our company and for our clients work.  I will post some examples of this in the future.

If we can help our clients via our products, services, and partnerships, we will for sure turn this situation into a positive one.  What are you doing in the current economic environment to make "lemonade"?  Let us know if we can help. 

Attached is an article explaining how the new financial legislation is going to possibly discontinue the current Home Valuation Code of Conduct (HVCC) and establish a new process to ensure that appraisals are done by qualified, uninfluenced professionals.  For those that follow the real estate industry, you know that the HVCC has been very controversial not because of its intent, but rather its implementation.  In a nutshell, many Appraisal Management Companies have used the program to create models where the appraisers are either underpaid or unqualified.  This has led to the controversy.  However, the concept is a solid one which I would argue should be added to this legislation for environmental risks.

I presented at the CT Appraisal Institute meeting and prior to my presentation, the president of the CT AI discussed a bill that requires these AMC's to be registered.  This makes sure that the people that run the AMC's are qualified to do it.  But at least it was put together to keep better tabs on the implementation of the process.  Right now, environmental risks are done in a haphazard way from bank to bank.  Often, environmental professionals and companies are chosen based on the likelihood that they will not raise major issues in their studies.  Often it is due to lenders having influence over the process.

The financial industry is making monumental changes to its regulatory efforts...why not add environmental to this process at this point?

What do you think?

http://www.dsnews.com/articles/financial-reform-legislation-calls-for-hvcc-replacement-2010-06-30

I just returned from the Environmental Bankers Association meeting in Virginia.  Once again, it was a well thought out, solid conference with great speakers and great networking.  One thing that has emerged recently is the emergence of energy/sustainability issues vs. the traditional environmental contamination/risk management topics.  It is creating a sort of conflict right now.  For instance, when does the transition officially occur within the risk management function within lenders.   This was a big topic of the open forum at the conclusion of the conference.

I would argue that it isn’t an either/or but just another issue that we as risk managers need to keep track of and make sure we are learning more about green issues while not losing track of our roots.  As a company, ORMS needs to make sure we are helping our clients with the things that are important to them.  Right now, I would argue that traditional environmental issues are still the top priority for lenders but energy and sustainability is gaining momentum.  Some of our clients care more about energy so we address these issues for them.  That is the great thing about establishing an extensive network.  It keeps your prepared to help at a moment’s notice.

Time will tell when/if an official transition occurs.  When it does (and yes I do believe it is a when), make sure you are prepared to help your clients get through it.