I recently got a desperate cry for help from Ellen, a long-tome loan officer. She’d worked diligently to get a 504 loan funded. Everything seemed in order: SBA had issued its authorization. All the necessary documents were signed and recorded and had met the CSA and District Counsel cut-off dates. Then everything blew up.

ELLEN. Richard, my loan was all dressed up and ready to go! Then I got an email from the District Counsel asking if I’d sent the Subordination and Non-Disturbance Agreement to SLPC as a 327 Action for review and approval. I didn’t know I had to do that. The CDC Closing Attorney reviewed the ALTA Title Policy when he issued his opinion and didn’t see any issues. He even checked the SOP and found no requirement for a 327 Action approving the SNDA. So now they tell me the loan is in jeopardy of being pulled from funding. Help! What’s the issue?”

ME. Here’s the situation:

Years ago, the then owner of the real estate leased a small portion to a cell phone carrier for a tower. Although the land had sold several times since then, the lease was still in place. And yep! You’ve probably guessed it. When the title company was asked to insure the CDC’s lien position, the lease showed up smack in the middle of Schedule B of the title policy as an exception. The lien created by the cell tower lease would be superior to the 504 lien and that was simply not allowed by the authorization.

This raised all sorts of questions in my mind. There probably had been several opportunities to address this issue. You’d have thought that the appraisal would have mentioned it. Come to think of it, what impact did the leased land have on the appraised value?  Was there a preliminary title commitment or report that showed the lease? Did anyone do a site visit and look out yonder to see a cell town rising? And could this issue have been caught earlier in the process?

MY RECOMMENDATION. Ellen, it’s my practice to get a preliminary title report even at the time of application. There may be a charge from the title company but it’s generally negligible and if you have a good relationship and promise you’ll get the final title policy from them, they might waive the charge.

The prelim is helpful for discovering all sorts of interesting stuff, like odd ball liens that no one ever told you about or encumbrances like a railroad track in the middle of the building or an encroaching oak tree. All of these cause issues that need to be dealt with before getting the loan dressed up and ready to fund. And yeah, sure your attorney should review the prelim before funding. But then, attorneys might consider something minor that SBA would consider huge.

We’ve gotten to this point. Now what?

You need to get borrower’s counsel to draw up an SNDA, subordinating the lease to the 504 lender’s lien. The lender, landlord and tenant need to sign it. Once recorded, the lease would still show on the title, but in a subordinate position, and District Counsel could then issue its opinion and allow the debenture to fund.

You may have to update the time-sensitive documents such as the financials and NAC letters, and of course make sure your closing documents have the right dates. Now your loan will be all dressed up and ready to fund!

Richard Jeffrey
Senior Associate CDC/504 Program