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)

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.