I ran into Joe, a JRB client, last week at our local coffee shop. As I was pouring creamer into my coffee from the little plastic container, Joe updated me on a situation we’d solved together a few months back. So nice to enjoy a rehash session over a hot cup of joe, with Joe:

JOE. Remember, Richard? This had never happened to me before. Our CDC had the 504 loan approved and the TPL had closed on the real estate purchase. There I was at the closing table with the TPL Lender, the borrower and its attorney, when suddenly the borrower blurted out, “I need more money!” I calmly replied “Now? You want more money now?” I was anything but calm.

Turns out that the borrower decided at the last minute to include some upgrades that, while not necessary, were certainly desirable. Since the debenture pool wasn’t yet created, the debenture could be withdrawn from the pool. However, the loan would have to go back to underwriting once the new numbers were firm. What’s more, The 504 application would have to be re-underwritten and re-submitted. And if approved, new SBA Terms and Conditions would have to be drawn up and new Promissory Notes and collateral documents would have to be written for both the CDC and the TPL.

While there was no material adverse change, I just hated resubmitting a loan for approval. The Constitutional prohibition of double jeopardy does not apply to CSA/SBA underwriting!

ME. So I discussed possible alternatives with Sandy Mortan, JRB’s post-closing guru. Since the debenture pool wasn’t yet created, the debenture could be withdrawn from the pool. However, the loan would have to go back to your CDC for underwriting and approval once the new numbers were firm. The CDC could submit a 327 amendment with the new amounts to SLPC for approval. If approved, the 327 would modify  the Terms and Conditions. A new document wouldn’t need to be issued. If already recorded, the collateral documents would have to be either released and new ones recorded or amendments would have to be recorded.

Alternatively, the CDC could submit a new loan application that would put the TPL in first (original request) and second lien positions (for the increased TPL amount) and SBA in third (original request) and fourth (for the increased SBA amount), Using that second option, the original funding could move forward.

JOE. So off we went with an amended request, along with humble and heartfelt apologies to the underwriters. Richard, our CDC’s loan officer couldn’t understand my angst. He said, ”So what if the interim loan had funded? We could have refinanced it, right?”

ME. Yes, indeed you could have, but in that case, the interim loan would have a term no greater than three years and the debt you would be refinancing would’ve had to incur not less than six months prior to the date of application.

JOE. And if we hadn’t moved with our usual speed, the 504 loan could have funded, the borrower would have had a prepayment penalty and would have had to pay interest to the next semi-annual payment date.

ME. Way too difficult to explain to the borrower. Congrats to you and your lending team!!

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