You’ve met Edgar Eager a loan officer at a CDC client, and his boss, Cathy Cautious. We’ve talked so often that they feel like family. Their office is close by, so we have lunch from time-to-time at our favorite haunt, the Comfort Food Café.

Last week, they caught me up on some loans that were going to loan committee. And as usual, Edgar was eager to get the prospect’s deposit on the loan fees so underwriting could begin. But he faced a familiar dilemma: The property didn’t appraise. We hashed it out over lunch:

EDGAR. The project involves a significant amount of leaseholds, and they don’t hold much value. You often say that a 504 loan is structured based on costs, not on value. So what’s the issue?

CATHY. That’s true, Edgar. The amount of financing in a 504 deal is based on eligible project costs: the good old 50-40-10.

EDGAR. So what’s the issue? We finance 40% of costs, get a second lien, and off we go!

ME. Whoa, Edgar! Financing doesn’t happen just by saying, “Poof! Off we go!!” As in this case, making magic takes a closer look – and some work. First, the collateral has to be adequate. Generally, the second lien position is considered adequate. However because leasehold improvements provide minimal collateral value, the CDC must consider requiring additional collateral. What else does the prospect have?

EDGAR. Do you mean items like Accounts Receivable or Inventory?

CATHY. That wouldn’t work because the business might need them to secure a line of credit to sustain business operations.

ME. Okay, the next step is to tell the TPL that you need the SBA lien to be a shared lien (pari passu1) with the Third Party Lender. So in the event of liquidation, the TPL gets a percentage of the proceeds commensurate with the percent of financing provided, and so does SBA. That will require an agreement between the TPL and the CDC/SBA entered into at closing. You’d better start drafting that now to work out any kinks.

EDGAR. One more thing I have to sell. The TPL gets a first lien but it must share it with SBA.

ME. Don’t despair. After all, you could have been named after Edgar Bones, the Great Wizard.2 You’ll rise like a Phoenix. Now go work your magic!

Richard Jeffrey, Senior Associate
CDC/504 Program
richard@jrbrunoassoc.com
www.jrbrunoassoc.com

1 pari passu: side by side; at the same rate or on an equal footing

2 Edgar Bones ref.: Harry Potter books and movie. Edgar Bones (d. 1981) was a “Great Wizard” and  a member of the  original Order of the Phoenix in the 1970s and fought in the First Wizarding War.