Most lenders are aware that they must require their borrowers to carry appropriate insurance coverage on all collateral securing their loan. Lenders know that correctly documenting insurance coverage is vital to protect the lender’s interest in its collateral as well as to comply with the terms of the SBA Authorization if the lender is an SBA lender. But some lenders may be inadvertently relying on outdated practices to document insurance coverage which could put the lender at risk.

     Many lenders require their borrowers to simply provide them with ACORD certificates of insurance to document the insurance coverage that a borrower has in place. Some of the more common certificates of insurance are the ACORD 25 (“Certificate of Liability Insurance”), ACORD 27 (“Evidence of Property Insurance”) and ACORD 28 (“Evidence of Commercial Property Insurance”). But don’t let the title of these certificates fool you. ACORD certificates explicitly state that they are issued “as a matter of information only” and they “confer no rights upon the additional interest” named in the certificate. The certificate also states that it “does not amend, extend or alter the coverage afforded by the policies.” Coverage can only be amended through the actual policy (or binder, for newly written coverage) and its endorsements. Therefore, although ACORD certificates are helpful for verifying that a borrower has insurance in place, the certificates are meaningless unless lenders also obtain a copy of the borrower’s insurance policy as well as all endorsements to confirm that the information set forth on the certificates is correct.

     In order to be in compliance with the SBA authorization, a lender must be named “mortgagee” on the policy if their collateral includes real estate, and “lender’s loss payee” if their collateral includes personal property. Although an insurance agent may issue an ACORD certificate showing a lender named as a mortgagee or lender’s loss payee, the lender may not be afforded the privileges and benefits of those designations unless the policy is actually endorsed to add the lender as a mortgagee and lender’s loss payee. As the certificate states, its confers no rights upon the additional interest named in the certificate unless the policy itself confers such rights and the company is likely to defend any claims brought by a lender that is not properly endorsed on the policy.  

     The SBA authorization also requires that all casualty insurance policies “must provide for at least 10 days prior written notice to Lender of policy cancellation.” Older versions of ACORD certificates specifically stated that the agent would “endeavor to mail ___ days written notice to the certificate holder” and agents would often fill in the number of days that the lender requested. But the most up to date ACORD forms state that if any of the policies listed on the certificate are canceled before their expiration date, “notice will be delivered in accordance with the policy provisions.” This change reflects the fact that the cancellation provisions in the policy itself instruct an agent who they must notify and how many days notice they are required give, which may differ depending on the reason for cancellation. An insurer is not obligated to notify any third parties of notice of cancellation, even those named additional insured on the policy, unless the actual policy provides for such notice. This is just one more reason for lenders to obtain a copy of the coverage and notice provisions of the policy in addition to an ACORD certificate.

     So how can a lender make sure it receives a cancellation notice so that it is fully protected and in compliance with the SBA’s requirements?

• The best solution is to request that the insurer endorse the borrower’s policy to add the lender as a cancellation notice recipient through an endorsement to the policy;
• If the agent will not do so, a lender may want to contractually require the insured borrower to provide immediate notice of cancellation to the lender; or
• As a last option, a lender may choose to require frequently updated certificates of insurance to make sure coverage is still in place and that there have been no significant changes to the coverage.  

     If a lender is unable to get the insurer to provide notice of cancellation and the lender must choose an alternative option, the lender should, as always, document its file with the steps the lender took to comply with the SBA’s notice of cancellation requirements.

     Although ACORD certificates provide valuable information to lenders, it is important that lenders also obtain a copy of borrowers’ insurance policies and all endorsements to confirm that the lender is named mortgagee, lender’s loss payee and additional insured, as applicable, and to confirm that the lender receives notice of cancellation of the policy. Failing to obtain such documentation could be a very costly mistake for a lender if collateral is damaged or destroyed or if the borrower is sued and does not have the proper liability insurance coverage in place.

For more information regarding SBA insurance documentation, please contact Katie at kobrien@starfieldsmith.com or (215) 542-7070.

     In 2010 the National Conference of Commissioners on Uniform State Laws approved proposed amendments to Article 9 of the Uniform Commercial Code (“2010 Amendments”). The 2010 Amendments are in the process of being adopted by each state with an effective date of July 1, 2013. Most of the 2010 Amendments are just clarifications to provisions of revised Article 9 that came into effect on July 1, 2001. Some of the proposed changes under the 2010 Amendments include: definition of an organization’s “public organic record” for purpose of determining a registered organization’s name; clarification on the “location” of a debtor and revisions to the filing requirements against trusts and estates. One of the 2010 Amendments is expected to have a considerable impact on how a secured party identifies an individual debtor on its financing statement.

     Current Article 9 simply requires that for individual debtors, a secured party use the “name of the debtor” on its financing statement. Due to nicknames, changing marital status and cultural differences, determining the correct “name of the debtor” has proven to be, at times, a challenge for secured parties.   Common law provides that a secured party should use the name an individual debtor is “commonly known by,” but courts have gone in different directions in determining what is sufficient evidence of a “commonly known as” name. For example, different courts have ruled that the name “Mike” is both sufficient and insufficient for identifying an individual debtor with the first name “Michael”. See In re Erwin, 50 UCC Rep Serv 2d 933, 2003 Bankr. LEXIS 692 (Bankr. D. Kan., June 17, 2003) and In re Larsen, 2010 WL 909138, 72, UCC Rep.2d 187 (Bankr. S.D. Iowa 2010).

     The proposed 2010 Amendments provide two alternative approaches to determining the individual debtor’s correct name for filing a financing statement. Alterative A provides that a secured party has properly perfected against an individual debtor “only if” the debtor’s name on the financing statement matches the debtor’s name as it appears on its state issued driver’s license (or state issued identification card).   If the individual debtor does not have a driver’s license (or ID card), then the secured party should use the individual’s first name and surname.

     Alternative B is commonly referred to as the “safe harbor” alternative. The provision allows for filing against the “name of the debtor” as provided under current Article 9, but provides a safe harbor for using the name designated on a state issued driver’s licenses or state ID card.

     While the requirement to use the debtor’s driver’s license in Alternative A provides some uniformity to filings and search requirements for secured parties, it has also raised some concern regarding what will happen when a debtor’s driver’s license expires? For example, does a financing statement filed using an individual’s driver’s license become ineffective if the debtor changes its name when he or she renews his or her license? Is the secured party obligated to obtain an updated driver’s license during the life of the loan?   However, if a state has adopted the safe harbor alternative, the secured party will continue to have the burden of searching the debtor’s name under a variety of “commonly known as” names and not just rely on the debtor’s driver’s license. Finally, each state’s option to adopt either Alternative A or B, or to adopt their own modified version of Alternative A or B, will require secured parties to research each state’s individual debtor name requirements when searching and filing against individual debtors, instead of relying on a uniform search criteria in all states.

     The changes proposed under the 2010 Amendments for the most part will not create significant changes for Lenders, but its in Lenders’ best interest to familiarize themselves with these amendments now so that they can determine what changes, if any, may impact their closing and servicing practices and adopt policies to address those changes before the July 1, 2013 effective date.  

For any questions about the 2010 Amendment or Article 9, please contact Kim at krayer@starfieldsmith.com or (215) 542-7070.

Co written by: Patrick O’Rourke, a restaurant operations specialist and teacher, one of the founders of the upcoming Philadelphia Mobile Foods Association.

Taking it to the streets:

In the world of business, there is more than just taking one’s passion and opening one’s business doors – or in this matter, opening the truck window.

The Gourmet Truck business is one of the hottest areas of growth in America. Take for example Quick Service Restaurant’s take on the Food Bicycle http://www.qsrmagazine.com/consumer-trends/food-bikes-could-be-hottest-new-trend?microsite=595+4113 

While very popular in California and warm weather climates, Gourmet Trucks are now moving into the chillier climates. The new wave of high quality coming out of food trucks has brought upon us the great delights of talented young folks of all backgrounds finding their passion of putting food service on wheels.

With the growth of a new area of any industry, there are many new challenges created because of government enforcement of outdated codes of rules & regulations specific for different types of businesses, implementing funding and lending applications that don’t fit the new needs, marketing challenges, and many other aspects of business where square pegs are trying to be put into round holes.

Surprising Roadblocks:

At first one would think operating a food truck might be less expensive than a bricks & mortar restaurant. Oftentimes this is not true.

One example is that many health departments might not approve the gourmet food truck for use unless the business produces it’s food in a health department approved commercial kitchen – i.e. – bricks and mortar. 

And since trucks are on wheels and park on streets, there are new governing bodies besides the business code department (L&I in Philadelphia) and the local health department that become involved including:

• the local streets department 
• state motor vehicles
• local traffic police
• possibly state department of transportation, etc. etc., etc. 
• If selling pre-packaged items produced by the operator, then there is the State Department of Agriculture and/or Federal agency or two. 

And, I can almost guarantee there is no one out there in the governing agencies reaching out to other agencies in hopes of coordinating efforts to help the individual businesses find their way through the maze of laws, codes, rules, etc.

Worse, these regulating authorities are being guided in their enforcement by codes that were made long before business/liberal arts/culinary schools grads began to create and invent the newest of gourmet culinary concepts to travel and cook on wheels. 

Where is the Map?

From these and many concerns not only by the business owners but also the public that follows its favorite “truckees” as well as agencies empowered to protect the public, Mobile Food Vendors Associations (a/k/a Food Truck Associations) are forming throughout the country.

In Philadelphia, The Philadelphia Mobile Food Truck Association – http://phillymfa.org/ is in its formative stages under the leadership of Dan Pennachietti of Lil Dan’s Food Truck and Andrew Gerson, of the soon-to-be Strada Pasta truck.

Since December the Association has been on the fast truck-track expecting its incorporation by the first week of March and by mid-Spring to be in full gear working. The Truckees and others associated in the gourmet mobile food industry will be leading the way in mediating issues of code enforcement and regulations, parking locations, communicating among the truckees with their loyal followers andwith regional event organizers, as well as promoting this new and exciting way of enjoying the streets of Philadelphia.

     The SBA 504 Loan is a fantastic financing choice for owner-occupied commercial real estate because it requires minimal equity participation on the part of the borrower and a low interest, long term interest rate; however, the program also offers capital for items beyond real estate acquisition in the traditional sense.  A 504 loan can include an allocation towards improvements of real estate – i.e. – if an owner purchases real estate that requires renovations or improvements, this work can be financed as part of the loan package, in addition to equipment.

     This is especially helpful with “shell” spaces, which is the common form of delivery of office and flex/industrial condominiums.  In many instances, the developer / seller of such spaces will deliver the unit with painted perimeter walls, minimal heat / light, and utilities terminated within the space.  The buyer has the ability to customize the space to its needs and provide input from the initial stages of the “fit out” (improvement) of “shell space.”

     In addition to the “fit out”, 504 Financing can include financing of “long term machinery and equipment”, according to the SBA.gov website.  Our firm has been involved in many projects when the buyer will finance equipment and trade fixtures as part of the SBA loan.  Two examples of 504 projects that have included equipment financing are a commercial catering kitchen and a crematory (distinct and separate properties, of course).  The crematory financed the real estate (shell flex space), improvements (small office “fit out”), and the equipment (walk-in cooler, retort (oven), and related items).  The caterer wrapped his real estate (“shell space”), improvements (small office / conference room), and equipment (commercial kitchen equipment to include “the kitchen sink”) into one SBA 504 loan. 

     The ability to package real estate acquisition, improvements, and equipment into the SBA 504 loan is a fantastic way to maximize the two main benefits of the program – (i) low equity participation on the part of the borrower (up to 90% financing), and (ii) low, long-term fixed rates. 

Swope Lees participates with SeedCoPA on a number of 504 projects and its professionals are available to review the merits of the 504 Program as it relates to commercial real estate.  Please feel free to contact Swope Lees at 610-429-0200 or by email at Chuck@SwopeLees.com.  

     In October 2011, the SBA’s National Guaranty Purchase Center (“NGPC”) released a new version of the Regular 7(a) Guaranty Purchase Tabs Package (the “10 Tab System” or the lender’s “10 Tab Package”). Among the changes incorporated into the new 10 Tab System are new requirements which highlight some of the pitfalls SBA lenders encounter when liquidating SBA loans.   While there are several changes incorporated into the new 10 Tab System, this article will focus on changes which reflect program requirements governing a lender’s liquidation of a 7(a) loan as set forth in the SOP 50 51 3 and the Servicing and Liquidation Actions 7(a) Lender Matrix.

     The new 10 Tab System incorporates several clarifications to the information required on a lender’s transcript of account (“Form 1149″) provided in Tab 6. SBA’s Form 1149 is critical to the NGPC’s review of a lender’s 10 Tab Package: the transcript should reflect an accurate record of the borrower’s payment history, all recoveries, any liquidation expenses, and the lender’s application of each payment and/or all recoveries.  The new 10 Tab System clarifies, among other things, that the Form 1149 must accurately reflect:            

• The date and amount of each payment showing principal and interest applications;
• A record of all recoveries and expenses, with a note that “legal fees will be paid separately, if approved”;
• Any deferments;
• The source of funds for any application to principal only;
• The lender’s ending balance, which much agree with the lender’s latest 1502 reporting submitted to Colson; and
• If applicable, the amount of lender’s successful bid at foreclosure sale (reflected on the transcript as a credit to the principal balance). 

     In addition, Tab 6 in the new 10 Tab System also includes the following note: “For loans sold into the secondary market after January 31, 2011, SBA will only pay 120 days of interest. Any interest above 120 days paid to the investor will be billed to the lender.”

     These changes are consistent with the SOP 50 51 3 which provides: “In the event SBA is required to pay a secondary market holder more than 120 days of accrued interest because of Lender delay, the Lender must reimburse SBA for the difference between the amount paid by SBA and 120 days of accrued interest.” Furthermore, if expenses have been deducted from recoveries, lenders are now required to include care and preservation of collateral reimbursement request packages (“CPC Tabs”) for those expenses with the submission of the 10 Tab Package. Lenders should note that, pursuant to SOP 50 51 3, only recoverable expenses may be deducted from liquidation proceeds. In order to avoid potential liability for non-recoverable expenses, SBA encourages lenders to seek prior SBA approval of any expenses through an early submission of CPC Tabs. Furthermore, prior to the commencement of any non-routine litigation, including litigation which can reasonably be expected to result in legal fees exceeding $10,000.00, a litigation plan must be submitted to and approved by SBA. In addition, in almost all cases, liquidation proceeds must be applied first to recoverable expenses, then to the principal balance of the loan, and then to accrued interest. See SOP 50 51 3 at page 131. Misapplication of liquidation proceeds may lead to a repair or, in extreme cases, a denial of the guaranty. Pursuant to the instructions at Tab 6 of the new 10 Tab System, lenders must adequately document liquidation activities and be prepared to provide SBA with such documentation upon submission of any 10 Tab Package.

     All SBA lenders should be careful to comply with SBA’s guidelines on liquidation as set forth in the SOP 50 51 3, SBA’s Servicing and Liquidation Actions 7(a) Lender Matrix, the code of federal regulations, and prudent lending practices. Failure to comply with such guidelines may lead to a repair or denial of the guaranty.  

For more information regarding these and other issues involving the liquidation of SBA loans, contact the author at cevans@starfieldsmith.com or 215-542-7070.

     The stock market has gotten off to a very strong start in 2012, with the S&P 500 Index up more than 4% in the month of January. We believe this strong showing is the result of two major factors. First, investors remain vigilant in seeking alternatives to the anemic rates being offered for cash and short term fixed income investments. Second, earnings reports for the fourth quarter of 2011 indicated that companies continue to enjoy solid earnings. This makes the stock market, on the basis of price earnings multiples, look attractive. Also, guidance by companies about their future earnings was better than many expected.

     Given the January performance, it would be easy for investors to become overconfident about the direction of the stock market. It has been well publicized that the average retail investor has refrained from participating in the strong recovery, as the scary days of early 2009 when the market bottomed out are not yet a distant memory. If strong monthly performances, like the one we just experienced, become more common, the retail investor will not be able to stay on the sidelines any longer. All too often, however, that investor decides to make an appearance in the market at the worst possible time. In that scenario the one who benefits is the one who is happy to sell his or her stocks at inflated prices to the unwitting newcomer.

     How can the average investor avoid falling into this trap? Quite simply, by having an investment strategy that appropriately allocates dollars between the various asset classes. Knowing how to allocate is not always easy. A good investment manager knows his or her client’s financial situation and fashions a model accordingly. The model has to be monitored and periodically re-balanced. In an overwhelming number of instances, it is a mistake to completely abandon stocks in favor of cash and/or bonds. If an investor was smart (or lucky) enough to be out of the stock market during the period leading up to March of 2009, the strong likelihood is that he or she would not have known when to redeploy cash into stocks. 

     By keeping investment dollars diversely allocated an investor has the best chance to keep strong months, like the one we just enjoyed, in his or her proper perspective.

Alan Mandeloff, CPA/PFS, CFP is president of Citrin Cooperman Wealth Management, a registered investment adviser that provides personal financial planning, investment management and insurance design and brokerage. Citrin Cooperman Wealth Management is an affiliate of accounting, tax and business consulting firm Citrin Cooperman. Alan can be reached at 215-545-4800 or amandeloff@ccwmlp.com. 

     While much of the focus this year will be on the national election, it is clear that cautious optimism now abounds.  Many, but not all, of the carefully monitored economic barometers are confirming a continued but modest growth. At their January meeting the “Fed” left interest rates unchanged and commented that “the expectation is that the fed funds rate will remain exceptionally low until late in 2014. This bodes well for business and the commercial real estate industry that are substantially dependent on financing.

     As the economy expands and commercial real estate receives increased investor and lender attention a real concern is the way that Discounted Cash Flow analysis are used to analyze income properties.

     In the mid1980’s appraisers, analysts and investors started using a 10 year income and expense analysis to estimate the value of an income property and its potential IRR.  The projection process is known as a Discounted Cash Flow Analysis or DCF for short.

     The ever increasing availability and use of computers and “canned” programs such as the early Lotus and more recent Argus facilitated increased use of the analysis.  The problem is that no one has changed how these have been done for years and it’s time to recognize that “garbage in” produces “garbage out” i.e. the reliability of the analysis is only as good as the assumptions used to generate the analysis. 

     The benefit of performing a DCF, as opposed to using a single stabilized year approach (using a “cap rate”) and capitalizing the stabilized net operating income into value, is that a DCF analysis permits its creator to consider and estimate virtually every income, vacancy, expense and capital item on a year by year basis over a forecasted “holding” period, typically ten years although they can be applied to longer and shorter periods. In uncertain times a five year analysis may be more reliable.

     One problem associated with running a canned program to create and perform DCF calculations is often the un-admitted but true lack of a deep understanding of how to properly use the program by its author.  As a result, many analysts allow the program to perform any number of tasks without giving the amount of individual and meticulous instructions that the case warrants. When that occurs the preprogrammed formulas take over and produce results that often are not truly reflective of the intent.  In addition, these preprogrammed formulas and calculations often use built in averages and standard formulas that have not been overridden by the analyst who is really the “programmer”.

     The use of an Excel spread sheet, where line by line and year by year figures must be estimated and individually entered may be a more reliable way to perform a DCF especially when the property is encumbered by multiple leases.  Going line by line will make the analyst think more about the future actions of individual tenants and leases.

     I have recently informally reviewed the DCF analyses in the appraisals of over seventy five income properties in twenty seven states with a concentration in multitenant office buildings.  I have been astounded to see many commercial appraisers continuing to estimate that rents and expenses of multitenant properties will still escalate on a straight line basis over a 10 year holding period using annual escallation factors of 2.5 to 3 percent in their DCF analyses.  They are obviously ignoring the lessons of the past 4 years and the post WWII history of recessions.

     Since WWII, recessions have occurred in a range of two to ten years with two and ten year hiatus being atypical.  Most occur every four to eight years and often close to national elections.  If one is projecting a DCF with a ten year holding period (and how good is anyone’s “crystal ball” forecasting after three or four years anyway?) don’t you think it would be prudent to assume that a recession is going to occur within that time frame?  When recessions occur, property vacancy rates increase, rents go flat or actually decline while most operating expenses continue to increase.

     Where are the true professionals that recognize this and adjust their forecasts accordingly?  It is long overdue that the almost rote thinking of how these forecasts have been performed needs to be changed.

      Now, when a DCF is being created, prudence suggests (and I submit demands) that it incorporate forecasts that do not simply project everything increasing at the rate of 3% over the next 10 years and reflect more sophistication that includes consideration of future economic downturns and recessions.