by Benjamin Stolz, Esq. | Mar 17, 2015 | SBA
What is a CDC/504 Loan?
The Small Business Administration (SBA) has a loan program know as the “504 program”. The 504 program helps small business owners purchase commercial real estate (e.g., a hotel/franchise or a small office building). Unlike the 7(a) program that incentivizes private lenders to help small business by partially guaranteeing their loans, the 504 program is a hybrid.
Under the 504 program, the the borrower has two loans: one to a private lender and another to a Certified Development Company (CDC). In such scenarios, the real estate is financed by a conventional loan that is not guaranteed by the SBA; this lender covers 50% of the project. The second player is the CDC, a nonprofit company acting as a conduit for SBA funds, and it funds 40% of the project; this loan is 100% guaranteed by the SBA. The remaining 10% of the project is funded by the borrower.
In a CDC/504 Loan, the private lender takes a first position lien on the real estate while the CDC takes the second position lien. In the event of a default, a short-sale or foreclosure will usually result in proceeds sufficient to pay off all or nearly all the private lender. I say “usually” because as some of my colleagues have pointed out, real estate in some markets has taken a nose dive.
I am current with the bank, but months behind with the CDC, why aren’t they foreclosing?
The short answer to the question is that your first lender is not in monetary default, so they are unlikely to foreclose on the basis that you have defaulted another obligation, although in some cases breaching loan covenants and representations and warranties will stir a bank to action.If the second lien holder files a foreclosure action, the sales proceeds must still be applied in order of lien priority. Therefore, if the CDC sees that it will not reap enough to make foreclosure worth it, then why foreclose at all. In many cities market conditions for certain types of commercial real estate are so bad that the CDC simply cannot foreclosure. This posture is then assumed by the SBA once the guarantee to the CDC is paid and the SBA assumes actual ownership of the Note and Security Agreement plus the attendant personal guarantees.
If the SBA won’t foreclose, why do I need to worry?
Although foreclosure may not be in the cards for you, that is not to say the CDC won’t sue the borrower and/or pursue the guarantors. And, if they choose not to do so, the SBA still can once the guarantee payment to the CDC has been made. An SBA Offer in Compromise (OIC) may be an available option. If initiated early an OIC can sometimes provide hapless guarantors an opportunity to walk away from a mountain of debt for a relatively modest percentage of what was owed. But, a settlement is not foregone conclusion. The SBA will expect you to dig deep and make a serious offer, otherwise a quick rejection often follows.
Remember, if the SBA cannot collect, then they will send the bad debt to the Treasury Department for collection where a 28% one-time collection fee will be added to the debt. In addition the Treasury Offset Program (TOP) will begin to review the file and take action, including tax refund intercept and offset of social security benefits if you are already receiving them. And, if that is not enough, and you are gainfully employed, you will likely be the recipient of a federal wage garnishment order that can remain in effect continuously until the debt is paid in full.
by Benjamin Stolz, Esq. | Feb 21, 2015 | SBA
Under SOP 50 10 5(f), borrowers may be able to refinance their 504 loan if they meet certain criteria. Although still not as widely known to borrowers as one might expect, as of the January 1, 2014, refinancing has been possible, if:
(i) the transaction is used to refinance eligible business debt;
(ii) the new installment amount is be at least 10 percent less than the existing installment amount(s), and
(iii) the lender’s loan file includes an analysis of the rationale for the transaction and either:
(a) Both the Third Party Loan and the 504 loan are being refinanced;
(b) The Third Party Loan has been paid in full and the 504 loan needs to be refinanced as part of a larger transaction to provide funding for expansion of or renovations to the Project Property.
There is little question that SBA 50 10 5(f) represents a positive change in traditional SBA policy that has the potential to help many borrowers. If you did not already know this was an option, now you do.
by Benjamin Stolz, Esq. | Oct 10, 2014 | Foreclosure, SBA
The answer to this question depends on a variety of factors. In Texas, a borrower’s homestead may not be pledged as collateral for an SBA business loan and the lender will not seek to do so. However, in many other states this can and does occur. But, generally speaking, while there is no statute of limitations applicable to a foreclosure action by the government, the SBA cannot obtain a judgment to collect any deficiency remaining on the delinquent loan, post-foreclosure, if the six-year statute of limitations for suit on the loan has passed.
by Benjamin Stolz, Esq. | Aug 23, 2014 | SBA, SBA Lawsuit
It is settled law that state limitations statutes are relevant in determining a claim’s viability at the time the federal agency acquires the claim. If the state statute of limitations has expired before the government acquires a claim, that claim is not revived by transfer to a federal agency. FDIC v. Former Officers & Directors of Metro. Bank, 884 F.2d 1304, 1309 n. 4 (9th Cir.1989), cert. denied, 496 U.S. 936, 110 S.Ct. 3215, 110 L.Ed.2d 662 (1990). However, if it has not expired before the government acquires the claim, then the government will enjoy the full length of the federal statue of limitations.
In United States v. Summerlin, 310 U.S. 414, 60 S.Ct. 1019, 84 L.Ed. 1283 (1940), the Court held “that the United States is not bound by state statutes of limitations in enforcing its rights.” Therefore, the relevant federal statue of limitations for contract actions is contained in 28 U.S.C. § 2415(a) and is six (6) years. Therefore, the SBA, as a federal agency has six (6) years to file a lawsuit to collect, but is not barred by any limitations period in an action to foreclose on real property. In this case, 28 U.S.C. § 2415(a) is silent on foreclosure actions. The Supreme Court has instructed that, as a sovereign, the United States is subject to a limitations period only when Congress has expressly created one. Guaranty Trust Co. v. United States, 304 U.S. 126, 133, 58 S.Ct. 785, 789, 82 L.Ed. 1224 (1938) (citing United States v. Thompson, 98 U.S. 486, 488-89, 25 L.Ed. 194 (1878)). In the absence of such a limitation none exists. In Farmers Home Administration v. Mudhead, 42 F.3d 964 (5th Cir. 1995), the court also noted that there is “absent a specific federal limitation” and commented that “28 U.S.C. § 2415(c) does not apply to actions to foreclose mortgages.” Id. at 966 & n.5.
Therefore, when reviewing a foreclosure action in connection with a defaulted SBA loan, borrowers should not be surprised to find themselves embroiled in a foreclosure action many years into the future and well beyond the state state of limitations for such actions.