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SpotlightAttorney Spotlight
 

    

Ethan Smith
Ethan W. Smith, Esq.

Ethan focuses his practice in business law, with an emphasis on commercial lending, government guaranteed lending, mergers and acquisitions, real estate, contracts, commercial and corporate law. He is a closing attorney for various lenders nationwide. Ethan is also a designated closing counsel for several Certified Development Companies that operate in Pennsylvania, New Jersey and Delaware. In addition to representing commercial lenders, Ethan represents and counsels a number of small businesses in a variety of contexts, including mergers and acquisitions, corporate governance, and contract and real estate matters. 

 

As a closing attorney for commercial lenders, Ethan prepares and reviews loan files for conventional, SBA 7(a) and 504, and USDA B&I loans, confers with loan processors and in-house counsel, and drafts, analyzes and negotiates loan documents. He has closed hundreds of government guaranteed commercial loans through the SBA 7(a) and 504 loan programs, through the USDA B&I program, and has closed numerous conventional commercial financing transactions, including asset-based, real estate, and factoring arrangements. Ethan has closed numerous complex commercial transactions, often involving multi-jurisdictional issues and collateral. As a licensed title agent in Pennsylvania and New Jersey, Ethan provides title insurance for commercial projects including purchases, refinancing and ground up construction. Through his underwriters' national networks, Ethan coordinates title insurance, escrow and closing services for his clients nationwide. 

 

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Best Practices:

Equity Injection Requirements for Intangible Assets and SBA Mandated Loan Bifurcation

 By Joseph A. Ernst, Esq.

 

Joe Ernst
Joseph A. Ernst, Esq.
 
Under SOP 50 10 5(D), which became effective on October 1, 2011, revisions were made that significantly affected EPC-OC transactions. Lenders are now required to bifurcate business acquisitions that include real estate owned by an EPC into two loans. Such bifurcation of what once could be a single loan is the result of the new prohibition in SOP 50 10 5(D) that an "EPC may not use loan proceeds to acquire a business, acquire stock in a business or any intangible assets of a business or to refinance debt that was incurred for those purposes." SOP 50 10 5(D), pages 124-125. In other words, in the context of a business acquisition that also includes real estate, the EPC can only use loan proceeds to purchase real estate. The flip-side of this is that the OC, by default, is the only entity that may use loan proceeds to purchase business assets. This prohibition now causes what once could be a single EPC-OC loan to be bifurcated into two loans. The first bifurcated loan is made to the EPC for the purchase of the real estate, and the second bifurcated loan is made to the OC for the acquisition of the business assets. Although it is generally recognized within the industry that such EPC-OC loan bifurcation only serves to increase the cost to both the borrower and the lender, with no perceivable additional protection or benefit to the SBA, what many lenders may be overlooking is that the 25% equity injection required when there is a change of ownership and the purchase price of the intangible assets exceeds $500,000 requires that the purchase price financed by the two separate bifurcated loans must be aggregated for the purpose of determining the 25% equity injection requirement.

 

 

Under SOP 50 10 5(D), the general rule is that an SBA-guaranteed loan may be used to finance a change of ownership that includes intangible assets. SOP 50 10 5(D), pages 139-140. Intangible assets are specifically noted as including goodwill, client/customer lists, patents, copyrights, trademarks and agreements not to compete. Some of the more specific rules regarding financing intangible assets are: 

  1. If the intangible assets are in excess of $500,000, the borrower and/or seller must provide an equity injection of at least 25% of the purchase price of the business for the application to be processed under delegated authority, otherwise, the loan must be processed under general processing; and,
  2. The seller's portion (if any) of the required 25% equity injection is in the form of seller take-back financing, but the seller take-back financing must be on full standby for at least 2 years.

 

When what would have once been a single EPC/OC loan is now bifurcated into two separate loans in order to comply with the new prohibition in the SOP 50 10 5(D) regarding an EPC's use of loan proceeds, the vexing issue is what exactly is the purchase price of the business - is it the purchase price of the business assets alone or the purchase price of the business assets and the real estate?

 

The SOP 50 10 5(D) mandates that the purchase of the business assets (including the intangible assets) and the purchase price of the real estate must be combined or aggregated to determined the required 25% borrower and/or seller equity injection for delegated processing. This aggregation of the purchase price that is now financed by two separate loans is required by the dictate in the SOP 50 10 5(D) that: "The 'purchase price of the business' includes all assets being acquired, such as real estate, machinery and equipment, and intangible assets. Real estate may not be removed from the transaction and financed separately to avoid the 25% equity injection for PLP processing" [emphasis added]. SOP 50 10 5(D), page 140. This dictate plainly means that the lender cannot avoid the 25% equity injection PLP requirement by deciding to separately finance the real estate, and through such means just use the purchase price of the business assets for determining the required 25% equity injection for delegated processing. Even though the lender is now required by the SBA to remove the real estate from the transaction and finance the real estate separately, it would be highly imprudent for a lender to interpret this requirement to mean that SBA mandated loan bifurcation permits or allows the lender to strip away the real estate purchase price and just look at the purchase price of the business assets. If (i) the purchase price of the intangible assets is in excess of $500,000, (ii) the lender proceeds under its delegated authority, and (iii) the lender elects to only use the purchase price of the business assets to determine the required 25% equity injection, then lender is likely to encounter a denial or repair of the SBA Guaranty.

 

For more information on the equity injection requirements for intangible assets and the newly mandated bifurcation of SBA guaranteed loans contact Joseph at: [email protected] or (215) 542-7070.

 

 

 

       

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Seminars  

                  

Seminars and Events

 

SBA Eligibilty Hot Topics Webinar 

Presented by:  Ethan W. Smith and Kimberly A. Rayer

Date:  Tuesday, January 31, 2012

Time:  3:00 PM to 4:30 PM EDT

Location: Live Audio Webinar 

 

If you are interested in signing up for this webinar, please click here.

 

 

 

 

 

 

 

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                         Did You Know... 

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 ...that Starfield & Smith, P.C. is retained by lenders nationwide to consult on SBA eligibility and compliance matters?

 

 
For more information about these and other services Starfield and Smith, P.C. provides its lender clients, call us at (215) 542-7070.

 

 

                                                                                                       

 

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ContactInfo Starfield & Smith, P.C.
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1300 Virginia Drive | Suite 325
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