Case #1. There is no “I” in “Team.” One great advantage of being on the JRB Team is receiving a variety of challenges from an exceptionally intelligent community of lenders: You. Another one: I’m grateful for being able to connect with my fellow Team members. In fact, sometimes it’s a life saver. Here’s what happened just the other day. I started to answer what looked like a very simple question:
Lender. One of our borrowers is refinancing its TPL. The existing TPL has a prepayment penalty. Can we subordinate our 504 loan to a new TPL that will pay off the existing debt plus the prepayment penalty?
Me. This would make the 504 loan subordinate to the new TPL debt increased by the amount of the prepayment penalty. It didn’t require a lot of research, so I chose to give the only answer that seemed correct: “No.” Thank heavens, before I sent out my answer, I got a reminder from Sandy Mortan.
Sandy Richard, we’re supposed to be getting SBA guidance on this any day now. You know that recent legislation allows for a CDC to process a cash-out subordination to re-leverage a TPL loan to a total LTV of 90%? You need to change your “No” to “Yes” when we get the guidance. Right now all the new money in a TPL refi must be used to improve the property. Once SBA issues the notice, new funds can be used for business expenses.
Me. Sandy saved the day. And my dignity.
Case #2. Where’s that documentation? Since we’re talking about refinancing, have you ever had a client who just couldn’t find documentation proving that the first loan in a series of refi’s was for eligible expenses? This client knew he’d borrowed money to buy the property in 2005 but the original note included some working capital. Well, his memory wasn’t that good and neither were his files. His attorney was a one-woman practice and she had died. If all else fails, certification should be acceptable. The borrower can certify as to the breakdown of the original use of funds.
Case #3. Read the contract! Then there was the client who had a construction contract for $1 million. He called me to ask about the contingency. “Sure,” I said. “You are allowed a contingency of 10% of the amount of the construction.” The client was relieved, but sent me the construction contract to make sure. Good thing too. It turned out that the contract already contained a $50,000 contingency and $300,000 for equipment. So the client really had a contract for $650,000 for construction, for which the contingency was limited to 10 %: $65,000. But since the contract already had that $50,000 contingency, the contingency could only be the difference between $65,000 and the existing $50,000 continency. And there would be no contingency for the equipment.
Lessons learned: Let experience and teamwork be your guide! Keep your challenges coming.
Senior Associate, CDC/504 Program