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SBA 504 Q&A: Annual Servicing Letters (Requests for Information)

May 2016

Q: Why does Florida First Capital send Small Business Administration (SBA) 504 loan borrowers a letter every year requesting financials and asking for other information related to their business? Many borrowers think once their loan is funded they don't have to provide this information again.

A: The SBA requires the Certified Development Company (CDC)/Florida First Capital to monitor the performance and health of the small business as well as preserve and protect the collateral securing the 504 loan. One way of doing that is to request from the borrower(s) and obligor(s) of the 504 loan information that provides key data that Florida First Capital can in turn use as a resource for oversight and review of the business.

Some of the main pieces of information that is requested annually is proof of required insurance coverages; evidence of payment of all property taxes and assessments; verification of status of the first mortgage loan and copies of the most recent tax returns and current debt schedules for all obligors. These requirements are outlined in the loan authorization as well as in various loan closing documents such as the 504 note and the borrower and operating company certification.

Following are further details regarding these requirements, which the CDC will request on an annual basis as required by the SBA:

1) All current insurances as listed in the loan authorization:

“Insurance Requirements--Prior to 504 loan closing, the CDC must require the borrower to obtain the following insurance coverage and maintain this coverage for the life of Loan …”

2) Current financials (most recently filed corporate tax return(s)) and/or interim financial statements (balance sheet and income statement for operating company). Also corporate tax returns for the EPC if the loan is structured as an EPC/OC. These are generally required within 120 days of the most recent year-end however; the CDC can request financial information whenever it feels updated financials are necessary.

“Books, Records, and Reports -- borrower and operating company will:

(a) Keep proper books of account in a manner satisfactory to the CDC;

(b) Furnish the following type [select the one identified in the authorization] of year-end financial statements to CDC within _____ [120 days, unless specifically stated otherwise] days of year end:

(i) financial statements;

(ii) compiled financial statements;

(iii) reviewed financial statements; or

(iv) audited financial statements

(c) Furnish additional financial statements or reports whenever the CDC requests them; and

(d) Allow the CDC or SBA, at borrower's or operating company's expense, to:

(1) Inspect and audit books, records and papers relating to borrower's and operating company's financial or business condition;

(2) Inspect and appraise any of borrower's and operating company's assets; and

(3) Allow all government authorities to furnish reports of examinations, or any records pertaining to borrower and operating company, upon request by the CDC or SBA.”

3) Evidence of payment of property taxes for all 504 loans secured by real estate. Failure to pay property taxes when due is considered a default of the 504 note.

DEFAULT:

Borrower is in default under this note if the borrower does not make a payment when due under this note, or if the borrower or operating company:

A. Fails to do anything required by this note and other loan documents;

B. Defaults on any other loan made or guaranteed by the SBA.

C. Does not preserve or account to the CDC's satisfaction for any of the collateral or its proceeds;

D. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to the CDC or SBA;

E. Makes, or anyone acting on their behalf makes, a materially false or misleading representation to the CDC or SBA;

F. Defaults on any loan or agreement with another creditor, if the CDC believes the default may materially affect the borrower's ability to pay this note;

G. Fails to pay any taxes when due;

H. Becomes the subject of a proceeding under any bankruptcy or insolvency law;

I. Has a receiver or liquidator appointed for any part of their business or property;

J. Makes an assignment for the benefit of creditors;

K. Has any adverse change in financial condition or business operation that the CDC believes may materially affect the borrower's ability to pay this note;

L. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the CDC's prior written consent, except for ownership changes of up to 5 beginning six months after the loan closes; or

M. Becomes the subject of a civil or criminal action that the CDC believes may materially affect the borrower's ability to pay this note.

4) Because the failure to keep any loan to another creditor current is considered an event of default on the SBA 504 loan (see “F” above and below), Florida First Capital is required to monitor the status of the first mortgage loan that is part of the 504 loan project and which holds a senior lien position ahead of the SBA.

DEFAULT:

Borrower is in default under this note if the borrower does not make a payment when due under this note, or if the borrower or operating company:

… F. Defaults on any loan or agreement with another creditor, if the CDC believes the default may materially affect the borrower's ability to pay this note.

Florida First Capital may request additional information upon receipt and review of the annual servicing information that it receives from a 504 loan borrower as a part of the requirement by the SBA to monitor performance of the small business and to do everything possible for the care and preservation of the project collateral. However, Florida First Capital is sensitive to the demands of running a business and it will always keep any such additional requests to a minimum when possible.

If you have a question you'd like our SBA 504 loan experts to answer, email us atinfo@ffcfc.comor call 850.681.3601 or toll-free at 888.320.5504.