{meta_title}

SBA Eliminates 504 Loan Open-Ended Indemnification … And Many Headaches

Mar 2015

The Small Business Administration (SBA) will no longer require any documentation on open-ended indemnities on 504 loan applications. The SBA's problematic requirement had been creating mounds of paperwork for months.

After consulting with various colleagues, the SBA's Office of General Counsel recently concluded that there are no legal impediments to the SBA's taking title to property that is subject to an open-ended indemnification provision. The SBA would not violate the Anti-Deficiency Act or the Adequacy of Appropriations Act if the Agency were to take title to 504 project collateral subject to indemnification provisions.

Therefore, after many headaches, 504 Certified Development Companies (CDCs) are no longer required to review title documents for open-ended indemnification clauses, attempt to obtain waivers for, or provide documentation related to any such open-ended indemnities found in title documents.

The SBA made the decision official on March 16, 2015, as published in Procedural Notice 5000-1337. This solution has been many months in the making, and the result of the hard work of a lot of people at the National Association of Development Companies (NADCO) and many people at the SBA.

Background

Under the Anti-Deficiency Act, federal employees are prohibited from making or authorizing an expenditure from, or creating or authorizing an obligation under, any appropriation or fund in excess of the amount available in the appropriation or fund unless authorized by law. It also prevents them from involving the government in any obligation to pay money before funds have been appropriated for that purpose, unless otherwise allowed by law. Federal employees who violate the Anti-Deficiency Act are subject to two types of sanctions: administrative and penal. In addition, federal employees may also be subject to fines, imprisonment, or both.

CDCs had found themselves challenged when SBA employees, concerned about their potential liability for violating the Anti-Deficiency Act, refused to approve 504 loan debenture packages for funding because of the risks associated with contingent, indemnification or hold harmless provisions found in covenants burdening real property which could potentially obligate the federal government should the government take title to the property in the future.

Oftentimes, indemnification provisions, which are frequently “buried” in easements or other documents affecting the project property, are the culprits that give rise to these anti-deficiency concerns. The concept of indemnity shifts the liability for loss from one person held legally responsible to another. Indemnity or hold harmless agreements provide reassurances for reimbursement in case of an anticipated loss and are quite common clauses in real estate development documents. For instance, easements and other agreements affecting access to real property, generally contain indemnification or hold harmless provisions in favor of government entities or developers who may be called upon in the future to incur expenses in connection with the maintenance of the easement.

Fear of obligating the government under the terms of an indemnification or hold harmless agreement and theoretically submitting the SBA, or a particular individual, to the prescribed penalties of the Anti-Deficiency Act had led some SBA employees to withhold approval of 504 loan debenture packages until indemnity or hold harmless covenants affecting project real property, could be revised to eliminate the contingent liability to the federal government. At the time, the only solution was to eliminate the risk from the offending indemnity or hold harmless provision by amending the recorded agreement. Unfortunately, that ad hoc approach was costly, time-consuming and unpredictable.

For more information about SBA 504 loans in Florida,contact a Florida First Capital Loan Officer hereor email us atinfo@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.