Special thanks to Ed Feiner of the Kutztown SBDC for his great video and editing skills!
By: Janet M. Dery, Esq.
In connection with each application for an SBA-guaranteed loan, a lender must obtain a completed and executed U.S. Small Business Administration (“SBA”) Statement of Personal History (SBA Form 912) from each proprietor, general partner, officer, director, LLC managing member, 20% owner, Trustor and manager of day-to-day operationsof the applicant. A U.S. born or naturalized citizen will indicate his or her citizenship by checking “yes” to the question of whether such person is a U.S. citizen. At times, however, a lender may receive a completed Statement of Personal History that indicates the principal is not a U.S. citizen. In such cases, the lender must determine whether the business is still eligible for SBA-guaranteed financing.
According to the SBA, financial assistance may be provided to “businesses that are 51% owned and controlled by persons who are not citizens of the US provided the persons are lawfully in the United States” (SOP 50 10 5(D), page 120, Section E). If the principal indicates on the Statement of Personal History that he or she is a lawful permanent resident alien (“LPR”), the lender must obtain proof of this fact. The proof should consist of the U.S. Citizenship and Immigration Services (“USCIS”) Form I-551 (commonly known as a “green card”), which will be in the form of either a Resident Alien Card or a Permanent Resident Card. Lenders should verify the information on such form, including confirming that the applicable Card is not expired, as the form must be renewed every ten (10) years. So long as the LPR status is verified by the lender, and subject to meeting all other SBA eligibility requirements, the business owned by such LPR will be eligible to receive SBA-guaranteed financing.
If the principal is not an LPR, the lender must verify the principal’s status before it can consider making an SBA-guaranteed loan to the applicant business. Using the alien registration number supplied by the principal on the completed Statement of Personal History, the lender must submit to the SBA’s Sacramento Loan Processing Center a completed USCIS Form G-845 Document Verification Request, along with a copy of the principal’s USCIS documentation, and a signed and dated authorization statement from the principal, using verbiage set forth in SOP 50 10 5(D), authorizing the release of his or her status to the lender. Lenders should note that the Department of Homeland Security has recently revised USCIS Form G-845, and should be sure to use the version of the Form that indicates an expiration date of “01/31/2015″ in the upper right corner of the first page. The lender must insert “SBA-guaranteed loan” as the basis for the request in accordance with SOP 50 10 5(D), page 122, Section 5.a.(3).
If the result of the status inquiry indicates that the principal is (i) a documented alien admitted to the U.S. for a specific purpose and for a temporary period of time, (ii) an asylee or refugee (person receiving temporary refuge) with LPR status, or (iii) an alien subject to the Immigration Reform and Control Act of 1986 (“IRCA”), the applicant business might be considered eligible, provided the following additional requirements (“Additional Requirements”) can be met:
Finally, if (i) a business is owned and managed by foreign nationals, foreign entities, or non-immigrant aliens, (ii) the business is not listed in Appendix 1 of the SOP 50 10 5(D), and (iii) the Additional Requirements can be met, the applicant business might be eligible for SBA-guaranteed financing. Such loan should be submitted to the SBA for general processing.
Of course, a proposed loan must also meet all other SBA eligibility requirements to be eligible for SBA financing.
For more information on the eligibility of Non-U.S. Citizen owned businesses, please contact Janet at (215) 542-7070 orJDery@StarfieldSmith.com.
By Joseph A. Ernst, Esq.
Under SOP 50 10 5(D), one of the permissible uses of loan proceeds is for the construction of new buildings and renovations to existing buildings. SOP 50 10 5(D), page 81. Furthermore, it is clear under the SOP 50 10 5(D) that twenty percent (20%) of a newly constructed building may be leased “permanently” to a third party tenant. SOP 50 10 5(D), page 137. However, effective as of October 1, 2011, the SOP 50 10 5(D) now contains an express prohibition against using loan proceeds to improve or renovate any part of the space that is leased to a third party tenant. In the context of an existing building, it typically is relatively easy to identify and segregate the costs of making improvements or renovations to space leased to a third party tenant and, hence, relatively easy to comply with the prohibition on using loan proceeds to improve or renovate the space leased to a third party tenant. In contrast, in the context of ground up construction, the distinction between using loan proceeds for the permissible use of new construction and using loan proceeds for the impermissible use of improving space leased to a third party tenant can be much more difficult to make, particularly if the Lender does not have a through understanding of what is being constructed and why.
In general, loan proceeds used to construct the building’s shell and the mechanical, electrical and other utility systems serving the entire newly constructed building are permissible under the SOP 50 10 5(D), even if part of the newly constructed building will be leased to a third party tenant. In contrast, loan proceeds used for improvements to a third party tenant’s space that are designed or intended for the third party tenant’s specific or unique use of its space are prohibited under the SOP 50 10 5(D). In general, if the improvements are requested or needed by the third party tenant to operate its particular business operations in its space, then loan proceeds cannot be used for such improvements. By way of an example, its is permissible under the SOP 50 10 5(D) to use loan proceeds to construct all of the structural floors for ground up construction. However, under the SOP 50 10 5(D), it would be impermissible to use loan proceeds to finance the tenant’s fit-out or even to reinforce the structural floor of the third party tenant’s space if the third party tenant’s use of its space dictated that its floor have a higher than normal load bearing capacity. Lenders should be mindful of who will directly benefit from the improvements and wgho requires the improvements when conducting this analysis.
Because there is a grey area in ground up construction between the permissible use of loan proceeds for new construction and the impermissible use of loan proceeds for third party tenant improvements, Lender’s need to be cognizant of this distinction between permissible and impermissible use of construction loan proceeds for certain types of improvements. In ground up construction, particularly in the case where a third party tenant is already lined up to lease part of the space, a careful and through review of the construction contract is warranted to ensure that loan proceeds will not be used for impermissible improvements to a third party tenant’s space. If the construction contract is unclear as to the scope of work and/or the improvements that are to be made to the third party tenant’s space, then the Lender must obtain clarification to ensure that the loan proceeds will be used for a permitted use. In addition, in many instances, the borrower/landlord would not be undertaking ground up construction without having first secured in some fashion the rental income from a third party tenant; consequently, there may be a letter of intent or lease with the third party tenant. If this is the case, the Lender should carefully scrutinize any such letter of intent or lease with the third party tenant to ascertain if improvements are being undertaken that are unique or specific to that particular third party tenant. Should this be the case, care must be taking when disbursing the construction loan proceeds to ensure that such tenant specific improvements are not funded with the loan proceeds.
For more information regarding the prohibition on using loan proceeds for third party tenant improvements , please contact Joe at JErnst@StarfieldSmith.com or (215) 542-7070.
By Harris Eckstut
The restaurant business is a retail business – the one major difference, however, is that we manufacture the product as we sell it. Most marketing and merchandising rules and concepts of restaurants are therefore based on retail models.
When it comes to dining, our tastes as a culture are always changing; much like the style of the clothes we wear. Accordingly, restaurants should always be one step ahead of the game in taste, service, and marketing.
Certain segments of the general public may think blue jeans are always in style and acceptable, so the good old-fashioned staples of diners and burgers joints will always be in fashion. However, those wanting to bring in customers based upon innovative trends must have the edge on new concepts and promotional ideas.
In the past few years, cyber marketing – especially to the younger generation — has become the most dominant form of out-of-store promoting: Facebook, Twitter, and the all the other Internet stuff we old folks don’t quite understand yet.
Here’s a classic example of today’s marketing for entertainment in restaurants and bars: In the old days, restaurant and bar owners would listen to the band, track a its previous performances, determine whether it was popular enough to bring into the his/her restaurant/bar and then pay for ads in the papers, print and distribute flyers, etc. Today, bar and restaurant owners will ask the band to justify their popularity by sharing how many people it has on its Facebook. If the desired critical mass is insufficient, the bar owner doesn’t even bother to hear the band play before saying, “No.” If it does have the minimum – let’s say 1,000 – then he or she will listen to the demo or see the band play to determine whether it would be the right fit.
Marketing expenses is an all-inclusive line item. For most table service and quick service restaurants, the rule of thumb for a marketing budget is 5% of sales. I no longer call this line expense “advertising”. Nowadays I try to stay away from that term because it has the connotation of expenditures for paying for the traditional media of display print, radio, etc. And, although these “advertising” expenses are a part of the marketing expense equation, for restaurants – because of other promotional expenditures – it is limited. These other costs would include maintaining the website, cyber communications, and coupons/discounts/comps.
Usually for table service restaurants, and especially bars, the largest component of the 5% marketing line item expenses are the coupons, discounts, and other “freebies” we in hospitality “give away.” They are a critical component of promoting the business, but must be monitored carefully before one winds up paying people to eat and drink for “free” in your business.
These “freebie” expenses are dollar for dollar line item expense. Do not fall into the illogic of thinking that the hamburger only costs 25% – the price to you of the meat and roll – of what you charge for that burger. All the other costs of servicing that hamburger to the customer are always in place: the costs of the cook, server, dishwasher and server, the utilities, the rent, the insurance, etc., etc.
To further explain: A salesperson for a discount coupon book pitches his “book” by telling you that a $10 coupon only costs you the $3.00 for the food. He/she is very wrong. The $10 coupon costs you $10 – unless you have a profit margin of 5 or 10% — then it costs $9.90 or $9.95. Always remember that the costs of labor, utilities, rent, insurance, and all the other costs of doing business are connected to an item such as this discount coupon. So, if the ad costs you more than 5¢ or 10¢ a person, you are paying the customer to eat at your restaurant.
The other way to look at it – especially if you have a Chef working on a bonus by meeting the food cost budget - is “don’t charge (blame) the Chef for your marketing and advertising expenses.” (He or she is already temperamentalJ)
By Alan Mandeloff, CPA/PFS, CFP
It is becoming clear that 2012 will be remembered as a year that marked a significant change in a nearly 30-year relationship between stocks and bonds. The longest bond market rally of modern times began in 1981, just as the prime rate topped out at 20.5 percent. Imagine a prime lending rate of 20.5 percent! Why were rates so astoundingly high? Because the Federal Reserve, in its attempt to stamp out double digit inflation, permitted short-term rates to rise until it was convinced that the inflation cycle was essentially dead. The spike in interest rates not only cooled inflation, but killed the bond market and left the Dow Jones Industrial Average at roughly the same level it attained in 1961. That is a lost double-decade. Once interest rates began to fall, they fell sharply and the markets for both stocks and bonds were off to the races.
Interest rates today, of course, have come full circle from 1981 and are at astoundingly low levels. This is the main reason that over the last 30 years, bonds have outperformed stocks. Bond yields that were over 15 percent 30 years ago now sit at around 2 percent. Fears of inflation have been replaced by fears of deflation. During that period and, in particular, the last 10 years, stock market investors have had to endure sporadic periods of punishing volatility. The world is still in the midst of a painful de-leveraging process. Nevertheless, the global economy, with the help of central bankers, remains resilient. In fact, the S&P 500 now stands just 10 percent from its all-time high.
What comes next? Everyone understands that, at some point, interest rates will rise. Sooner or later the Federal Reserve will be confident enough about the economy and will become less accommodative. 2012 may be the year and if so, it will mean that the 30-year declining interest rate trend will begin to reverse itself and stocks will very likely resume their normal place as an investment group that, over time, outperforms bonds. This may not necessarily be cause for celebration because it is possible that both investment groups may decline, but with stocks losing less.
One thing is certain: change is near.
Alan Mandeloff, CPA/PFS, CFP is president of Citrin Cooperman Wealth Management, a registered investment advisory group that provides personal financial planning, investment management and insurance design and brokerage. Citrin Cooperman Wealth Management is an affiliate of accounting, tax and business consulting firm Citrin Cooperman. Alan can be reached at 215-545-4800 or email@example.com.
By: Ethan W. Smith, Esq.
On April 2, 2012, the Small Business Administration published a “Direct Final Rule” in the Federal Register, (Vol. 77, No. 63, April 2, 2012) which provides much-anticipated clarification to the EPC rule set forth at 13 CFR 120.111. The Direct Final Rule is the product of, and SBA’s response to, the controversy surrounding the SBA’s 2011 change in its interpretation of the EPC rule as set forth in SOP 50 10 5(D), which purported to restrict SBA lenders from utilizing an EPC-OC structure for mixed-purpose loans that included use of proceeds by the OC for purposes other than working capital (such as business acquisition, purchase of intangible assets or goodwill). Since the effective date of SOP 50 10 5(D), Lenders have been struggling to comply with the EPC rule reinterpretation and have often been forced to split or restructure loans in order to comply with the rule reinterpretation set forth in the SOP, often to the detriment of both the Lenders and their borrower customers. The clarification SBA provided by the SBA makes the EPC rule consistent with industry practice as it existed prior to the issuance of SOP 50 10 5(D) in the Fall of 2011.
The Direct Final Rule clarifies the EPC rule, stating that: “The practice of structuring a loan with the real estate held by an EPC that leases the real estate to the OC for operation of its business has become increasingly common. Further, it has come to SBA’s attention that many participating lenders have interpreted this rule to allow EPCs and OCs to borrow funds for the OC’s purchase of other assets for its use, including the purchase of stock or intangible assets (such as trademarks, copyrights, intellectual property, or goodwill), as long as the OC was a co-borrower with the EPC. SBA recognizes the need for this type of financing.” Federal Register Volume 77, Number 63 (Monday, April 2, 2012), page 19532. The Direct Final Rule allows the OC to utilize loan proceeds for “working capital and/or the purchase of other assets, including intangible assets,” provided that the OC is a co-borrower with the EPC on the loan. Federal Register Volume 77, Number 63 (Monday, April 2, 2012), page 19533 (to be codified at 13 CFR §120.111). The clarification provides Lenders with the ability to structure mixed-purpose loans for their borrowers without imposing undue hardship by either requiring the loan to be split into two loans or requiring that the loan be restructured.
The Direct Final Rule will become effective on May 17, 2012, unless the SBA receives significant adverse comment in the next 30 days. Interestingly, even though the SBA states that this clarification brings the rule into conformance with long-standing industry practice, the rule states that it does not have any “retroactive effect.” Id. at page 19532. The lack of retroactive effect presents Lenders with some uncertainty regarding how Lenders should structure loans during the six-week period between the issuance of the rule and its effective date, as well as how the Agency will treat EPC-OC loans that were “improperly” structured during the last 6 months. Accordingly, because this clarification is not retroactive, the best practice for Lenders is to delay approval of mixed-purpose EPC-OC loans until after the May 17, 2012 effective date. Although it is unlikely that significant adverse comment will be received by the SBA, Lenders could potentially risk their guaranty by failing to wait for the Direct Final Rule to become effective.
For more information on the updated EPC rule and other SBA best practices, contact Ethan at ESmith@StarfieldSmith.com or (215) 542-7070.
By Marcia McGavisk, SBA Specialist, Seedcopa
Surviving any recession can be a challenge for businesses, and the current one has tested even the strongest business owners. Those who do survive learn a lot in the process and often find themselves with opportunities for growth again as they emerge from those difficult times. One of the constant refrains you heard during this past recession was “I’ve never seen it like this.” Fear and uncertainty seem to have fed upon themselves and shocked many businesses into paralysis. The good news is that there are signs that business owners are ready to move forward again, and for those who do, there is a lot of opportunity to position themselves for growth. What that means for smart small business owners is that, while there is still some risk out there in the marketplace, there is also opportunity, and a Small Business Administration (SBA) loan may be the way to take the next step.
Entrepreneurs whose small businesses have weathered the storm and are profitable, are well positioned to take advantage of the SBA loan program. While start-up businesses may have a tougher time proving the viability of their plans in the current environment, businesses with a strong balance sheet and proven track record will likely be able to gain approvals and reap the benefits.
SBA loans fit a variety of business scenarios, whether the business is manufacturing, retail, wholesale, or service. The term small business can be misleading as the size standards for SBA loans make most business eligible. Some of the ideal candidates for SBA loans are those who fit the following scenarios:
The Chinese character for the word “crisis” is made up of two characters – one stands for the word “danger;” the other for the word “opportunity.” While there is always risk for a small business owner, there is also tremendous opportunity. Now may be the time to prepare for some of those opportunities as they come along. Call us today to discuss your financing needs.
By Ethan W. Smith, Esq.
The life-cycle of an SBA loan can be divided into four main sections: 1) Underwriting/Origination; 2) Documentation/Closing; 3) Servicing; and 4) Liquidation. SBA lenders often find themselves focusing on one or two of these areas in their efforts to preserve and protect the SBA guaranty. However, SBA lenders should be mindful that the guaranty can be jeopardized in any one of the four stages of a loan.
In the Underwriting/Origination phase of an SBA loan, mistakes can be made which imperil the guaranty regardless of subsequent actions taken by the lender. For instance, determinations regarding loan structure and eligibility, if incorrectly made, will often result in a recommendation for denial of the guaranty by the SBA National Guaranty Purchase Center (“NGPC”). Issues such as franchise eligibility, credit elsewhere, size standards and loan purpose must be correctly made or the guaranty will not be honored. Additionally, lenders’ credit decisions must be sound and well documented – early default loans will have their credit decisions reviewed by the agency. Although the SBA will not “second-guess” credit, the burden is on the lender to ensure that it has sufficiently documented its credit as a prudent lender.
The Documentation/Closing phase of an SBA loan is an area that results in many repairs and denials of the SBA guaranty. Often, lenders will miss items in their due diligence such as intervening liens, missing tax transcripts, insufficient payoff letters, etc., that can give rise to repairs or denials of the SBA guaranty. SBA reports that the most frequent reason for a repair of the SBA guaranty is the failure to obtain the correct lien position on collateral as set forth in the Loan Authorization. Lenders’ failure to perform the correct searches and/or to resolve issues shown by the searches properly and thoroughly is often to blame. Additionally, failure to obtain a commitment from a creditor to release the lien being paid off also creates problems for lenders. Finally, lenders sometimes fail to properly document and/or perfect their liens which can also risk the guaranty.
In the Servicing phase of the loan, lenders can endanger the guaranty by making servicing decisions that are imprudent or by failing to seek the approval of the agency when required. The SBA has made this process easier for lenders by issuing the Servicing and Liquidation Actions 7(a) Lender Matrix, which sets forth when SBA approval is required. However, it is important to remember that even if an action is delegated to the lender as a unilateral action, the lender must still document its file as to the reasoning and justification for each significant servicing action that it takes. Failure to do so can leave the SBA no choice but to recommend a repair if it cannot determine why the lender did what it did, and why it made sense.
Finally, in the liquidation phase of the loan, lenders often make simple mistakes that have big consequences for the guaranty. For instance, lenders often fail to perform site visits within the mandated 60 days following a payment default. Although seemingly innocuous, the failure to perform the site visit in a timely manner shifts the burden to the lender to prove to the SBA that the failure to timely visit the site did not contribute to any loss. This can be a difficult, if not impossible, argument to make, especially if collateral is missing.
SBA lenders need to be vigilant about guaranty protection throughout the entire life of an SBA loan. The four phases of an SBA loan, these “four pillars” of guaranty protection, are like the legs of a table – the loss of any one will likely make the “table” collapse and will expose the guaranty to repairs and denials.
For more information on preserving the SBA guaranty throughout all phases of an SBA loan, contact Ethan at ESmith@starfieldsmith.com or (215) 542-7070.
By: Jim Noone, SBA Lending – Relationship Manager
The SBA introduced the 504 Refinance program in 2010 as part of the Jobs Act. It has taken more than 12 months for the benefits of this program to filter through to borrowers, however, the benefits are substantial for any business with a commercial mortgage.
Let’s start with eligibility. In order to be eligible for this program, the business must have at least one loan that was originally used for the purchase of fixed assets. Conventional commercial mortgages are the most basic example, but, any debt used to previously acquire fixed assets meets this threshold.
Once this has been established, we then look to the amount of the request. Under the 504 Refinance program, the borrower may request up to 90% funding based on the appraised value of the underlying fixed assets. The funds requested beyond the current outstanding balance of the mortgage can be used for “Eligible Business Expenses,” which is terminology for any working capital or capital expenditures of the business. These include salaries, utilities, improvements, and other loan repayments, including lines of credit.
For example, a business currently has a commercial property with an estimated appraised value of $2 million and an outstanding commercial mortgage balance of $1.5 million. The owner may also have a Line of Credit of $200K that has, over the last two years, been difficult to pay-off and has become permanent working capital.
Under the 504 Refinance Program, this borrower may request funding of $1.8 million (90% x $2 million). The use of funds would be $1.5 million to refinance the commercial mortgage, $200K to pay-off the Line of Credit, and $100K for general working capital. The structure of the request would be that either the existing mortgage lender or a new lender provides a 1st Mortgage of $1 million and SBA provides a 2nd Mortgage of $800K. The terms of the 1st Mortgage are a negotiation between borrower and lender while the terms of the 2nd Mortgage are typically a 20-year, fixed interest rate and 20 year amortization, without balloons. For borrowers that funded in March of 2012 in this program, the 20-year fixed rate on the SBA 2nd Mortgage was 4.79%.
Creative ways to use this program for lenders include working with borrowers that are looking to expand without having demonstrated the period of stabilization required by the bank credit department. By utilizing the 504 refinance program in conjunction with the traditional 504 program, the lender can shift the higher LTV exposure in their existing collateral into two first mortgage positions on the existing and expansion collateral. Doing this typically retains the relationship with the borrower while minimizing credit exposure to 50% LTV loans.
If you are a borrower or lender seeking more information on how use of this program may accomplish your goals, please fill-out our contact form at Contact Seedcopa and we will follow-up with you quickly.
By Chuck Swope, CCIM, Swope Lees Commercial Real Estate, LLC
Community Development can take many forms and may have different meaning to various stakeholders. It can include a diverse workforce and employers, housing choices, attracting new business, and promoting excellent public schools.
Economic Development falls under the overall Community Development umbrella and is paramount to the overall success of a community or region. Economic Development includes fostering new businesses, growing and expanding existing businesses, anticipating future business needs, and providing the resources to effectively and efficiently carry our business tasks.
The SBA 504 Loan Program is a fantastic Economic Development tool for a number of reasons. First, the program encourages property ownership. Commercial and business property ownership provides small business owners the opportunity to build equity through as the mortgage on a property is reduced. This can serve as an investment and retirement tool for some small business owners. Next, the 504 Loan encourages real estate development within a community, which could include a new project, or repositioning or redeveloping an existing site, such as an abandoned facility or Brownfield. This type of development puts derelict properties back into productive use, provides construction jobs, encourages lending, and enhances the overall value of a community, adding to the tax base of the region.
SBA 504 Loans directly benefit the borrower / buyer of the property, but also provide substantial value to the local community. A community of owners will reap the benefits of ownership and “Independence through Equity.” SBA Loans promote investment, lending and create value in local communities, which is a good for the economy and the community at large.
Chuck Swope can be reached at 610-429-200, www.SwopeLees.com