Tag: lenders

SBA Clarifies Rules Regarding PPP Loans and Changes of Ownership

In a recently issued procedural notice, the Small Business Association (“SBA”) addressed a lingering question of borrowers and lenders related to the Paycheck Protection Program (“PPP”) process: What procedures are required for changes of ownership of an entity that has received PPP funds?

The notice, issued on October 2, describes when change of ownership is considered to have occurred and what impact such change has on a PPP borrower’s responsibilities under the program.

Definition of a Change of Ownership

For the purposes of the PPP, a “change of ownership” takes place when one of the following occurs:

  • At least 20% of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity;
  • The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or
  • A PPP borrower is merged with or into another entity.

A PPP borrower must aggregate all sales and other transfers occurring since the date of approval of the PPP loan in determining whether the relevant threshold has been met.

Is a Borrower Required to Obtain SBA Consent?

If a PPP borrower fails to satisfy one of the criteria below, SBA consent is required for a change in ownership to ensure the repayment of any unforgiven PPP loan amounts.

  1. The PPP loan has been paid in full or forgiven by the SBA.
  2. In the case of a stock sale or merger:
    (a) The sale or transfer involves less than 50% of the borrower’s   stock/ownership interest; or
    (b) The PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
  3. In the case of an asset sale of 50% or more of the borrower’s assets, if the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan.

If SBA consent is required, the PPP lender is required to submit certain documents to the SBA, including documents relating to the transaction and information about the buyer and its ownership. The SBA will review and provide a decision within 60 days of receipt of a complete request.

Borrower’s Responsibilities in the Event of a Change in Ownership

The PPP borrower remains responsible for all obligations under its PPP loan in the event of change of ownership, including performance obligations under the PPP loan, certifications it made in connection with its loan application, retention of records and providing records in connection with a request from the PPP lender or the SBA, as well as other applicable PPP requirements.

In addition, before undergoing a change of ownership, a PPP borrower must notify its PPP lender in writing and provide the lender with copies of relevant documentation related to the transaction prior to closing.

Regardless of whether SBA approval is required and/or obtained, if change in ownership involves a sale of equity interest or a merger, the new owner is responsible for all obligations under the PPP loan. If the new owners use PPP funds for unauthorized purposes, the SBA will have recourse against them. If the new owner also had a PPP loan, the PPP loan funds must be segregated and properly allocated among the two borrowers.

Unanswered Questions

While the notice clarifies a great deal about change in ownership issues related to PPP loans, there remain unanswered questions. Among those questions are:

  • What are the consequences of failing to obtain SBA consent for a change in ownership transaction?
  • What rules apply for changes in ownership that occurred prior to the issuance of the notice?
  • What should PPP borrowers do if their PPP lenders have not yet opened application portals for seeking loan forgiveness?

We will continue to monitor and keep you abreast of new developments related to PPP forgiveness. In the meantime, if you have questions or require assistance, please contact your Fraser Trebilcock attorney.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock Business Tax Attorney Edward J. CastellaniEdward J. Castellani is an attorney and CPA who represents clients involved with alcohol beverages as a manufacturer, wholesaler, or retailer. He may be contacted at ecast@fraserlawfirm.com or 517-377-0845.

Using Forbearance Agreements to Protect Commercial Real Estate Lender Interests During COVID-19

While much attention has been paid to the struggles of businesses, such as restaurants and retail establishments, to survive the economic downturn wrought by the COVID-19 pandemic, those who lend to such businesses for the purchase of real estate are also dealing with the fallout.

Every real estate loan payment missed by a borrower puts lenders in a more precarious financial position. Even borrowers who remain current on their loan payment obligations may find themselves in default, as lower property valuations result in borrowers failing to meet debt yield, loan-to-value or similar financial covenants.

While the economy in Michigan and across the country is reopening in fits and starts, it’s by no means “business as usual.” Economic woes are likely to continue, which means that lenders will be forced to deal with more financially distressed borrowers. In some instances, this means the possibility of foreclosure. In others, this means dealing with debtors in bankruptcy, as evidenced by a recent surge in bankruptcy filings. According to data from Epiq Systems, commercial Chapter 11 filings were up 48% in May as compared to May 2019.

However, more often, loan defaults by borrowers, and the possibility of future defaults due to financial distress, are dealt with outside of foreclosure or bankruptcy. In many cases, a lender is better off working out a deal that keeps a debtor in the property and running its business, so that it can work through the distress and remain solvent. The potential for recovery via foreclosure or bankruptcy is often limited—not to mention the costs associated with such processes are often steep, and with widespread court closures, any judicial action may be curtailed.

One of the primary tools lenders can use to accommodate distressed borrowers, while preserving their own rights and remedies, is a forbearance agreement.

In a typical forbearance agreement, the borrower acknowledges that it has defaulted on its obligations, and the lender agrees that it will refrain from exercising its remedies for such defaults as long as the borrower performs or observes the new conditions set out in the forbearance agreement, and, by a certain date, cures the defaults. A lender who forbears from enforcing remedies does not waive defaults, but rather grants a borrower time to work through its issues.

A forbearance agreement is best suited for situations where the lender has assessed that the borrower’s struggles are short term and will improve. Given that conditions for many borrowers will improve as the economy reopens, forbearance agreements will likely be widely used by lenders in the coming months.

While every forbearance agreement is customized to address a specific scenario, most contain common provisions, including:

  • Forbearance Period: The forbearance period is the period within which the lender will agree to forbear from exercising its default remedies under the loan agreement. The forbearance period typically lasts for a specified period of time (e.g., 120 days), subject to early termination by the lender if the borrower defaults in its obligations under the forbearance agreement.
  • Borrower Acknowledgements, Reaffirmations, and Waivers: Borrowers are commonly required to acknowledge and affirm key terms, representations and warranties from the existing loan agreement in the forbearance agreement. These may include waiving defenses, acknowledging amounts due under the loan, and affirming the validity of the lender’s lien, among other things. Lenders also typically condition their agreement to forbear on the borrower waiving claims against the lender based on the loan documents and dealings between the parties taking place prior to the execution of the forbearance agreement in order to avoid lender liability claims.
  • Agreements as to the Financial Terms of the Forbearance: A forbearance agreement will address financial terms, such as the interest rate the borrower will pay during the forbearance period, which may be different from the original interest rate under the loan documents. Additional terms may include the amount of any forbearance fee payable by the borrower, a reduction to the lender’s commitment to extend additional credit, reduction of overadvance or overformula balances, and any deferral or modification to the debt service payment schedule.
  • Additional Reporting: During the forbearance period, a lender may request reporting information in addition to what is required by the existing loan agreement. Such information may include the borrower’s cash flow status and expenses, weekly business updates from the borrower, and access to the property for inspection.

A forbearance agreement can benefit both a borrower and lender. A borrower is given time to work out its business issues or attempt to sell or refinance the property, and a lender can shore up its position by addressing deficiencies in the original loan documents and negotiating more favorable terms as described above, and hopefully avoid having to exercise foreclosure or other default remedies under the loan agreement. For some borrowers, foreclosure and/or bankruptcy may be inevitable. But commercial real estate lenders are often well-served by pursuing a forbearance agreement in order to better align the interests of lender and borrower during the borrower’s recovery period.

If you have any questions about forbearance agreements, or real estate workout issues in general, please contact Douglas J. Austin at 517.377.0838 or at daustin@fraserlawfirm.com.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock attorney Douglas J. Austin has been at the center of real estate law for over 45 years. In addition to being a shareholder at Fraser Trebilcock, Doug is also the chair of our Real Estate Law department. He can be contacted at 517.377.0838 or at daustin@fraserlawfirm.com.