Conducting site visits are an important aspect of servicing SBA loans. Site visits allow lenders and Certified Development Companies (CDCs) to gain a first-hand impression of the borrower’s business operations, evaluate risks, and inventory the collateral. Frequent site visits help lenders and CDCs make prudent lending decisions by keeping them up-to-date with the condition of the collateral and the borrower’s business operations. Although a site visit may not prevent problems from occurring, it will reveal problems sooner, giving lenders and CDCs the opportunity to work out a solution with the borrower or act accordingly to increase recovery. For that reason, it is crucial for SBA lenders and CDCs to know when a site visit is required, how to prepare, goals of conducting a site visit, reporting requirements, and consequences of failing to conduct a site visit.
When a Site Visit is Required
If the aggregate recoverable value of the personal property collateral is more than $5,000, and/or the recoverable value of each parcel of real property collateral is over $10,000, a site visit must be conducted:
- Within sixty (60) days of an uncured payment default or sooner if the collateral could be removed, lost, or dissipated; and
- Within fifteen (15) days of the occurrence of an adverse event (i.e. a bankruptcy filing, business shutdown, or foreclosure by a prior lienholder) that caused the loan to be classified in liquidation status or sooner if the collateral could be removed, lost, or dissipated.
How to Prepare for a Site Visit
It is important for lenders and CDCs to obtain sufficient information to make prudent lending decisions prior to conducting a site visit. Lenders and CDCs should conduct the following steps before conducting a site visit, if applicable:
- Review the loan documents to determine what collateral was required, actually taken, and the priority position of any liens encumbering the collateral when the loan was closed;
- Obtain a current title report to verify the priority of liens securing the SBA loan;
- If the collateral is located on leased premises, contact the landlord to determine whether the rent is past due;
- Contact local taxing authorities to determine whether there are delinquent real or personal property taxes that have priority over the lien securing the SBA loan;
- Order an appraisal:
- Personal property – If the personal property is machinery, equipment, furniture, fixtures or inventory, hire an auctioneer or other expert to prepare a Liquidation Value Appraisal and to assist with the relevant site visit goals. If the personal property is unusual, such as intellectual property, order an appraisal from an expert with the appropriate qualifications.
- Real property – hire a qualified expert to prepare an appraisal.
See SOP 50 57 2.
Goals of Conducting a Site Visit
When conducting a site visit, lenders and CDCs must make a good faith effort to perform the following:
- Prepare a comprehensive written inventory that includes a complete and accurate description of the collateral, including its current condition, photographs, and the serial numbers of significant items of personal property;
- Determine the amount of expenses that must be taken into consideration to accurately calculate the recoverable value of the collateral;
- If the collateral is real property, determine whether there are occupants who are entitled to notice, who will need to be evicted, or who are paying rent that can be collected and applied to the loan balance;
- Review the environmental investigation report prepared at the time the loan was made, look for potential environmental problems during site visit, and follow the requirements concerning environmental investigations set out in the SBA’s standard operating procedures;
- Begin developing a strategy for liquidating the loan;
- If obligors have not filed for bankruptcy protection and are present and cooperative, obtain a copy of the financial records needed to determine whether a workout is feasible;
- Unless a workout or a judicial foreclosure action is contemplated, make arrangements to repossess the collateral using self-help repossession, so long as it can be done without “breaching the peace.” If it cannot be done without “breaching the peace,” consult legal counsel about filing a replevin action; and
- After acquiring possession or control over the collateral, take prudent and commercially reasonable measures to care and preserve the collateral.
See SOP 50 57 2.
A site visit report (“Report”) must be prepared and kept in the loan file after every site visit, regardless of whether the SBA loan is in regular servicing or liquidation status. The Report must document the lender or CDC’s conclusions, and include, for example, the lenders efforts to:
- Determine whether a workout is feasible;
- Identify the collateral available for liquidation;
- Establish the collateral’s recoverable value;
- Determine whether the borrower is behind on the rent and whether a liquidation sale of the personal property collateral can be held on-site;
- Determine whether any real property collateral is occupied by a person other than the borrower;
- Develop a liquidation strategy;
- Assess any environmental risk associated with the anticipated method of liquidation; and
- Arrange for the care and preservation of the collateral pending liquidation.
See SOP 50 57 2.
If a site visit is not conducted, lenders and CDCs must explain the reasons a site visit is not necessary or prudent in the loan file, and include the explanation with the Wrap-up Report. See SOP 50 57 2.
Consequences of Failing to Conduct a Post-Default Site Visit
Lenders should remember that the purpose of conducting a site visit is to ensure that the collateral securing the loan is being maintained. If a lender’s failure to conduct a post-default site visit resulted in a material loss on the loan because the collateral disappeared and/or declined in value, the SBA may be released from liability on its guaranty of the 7(a) loan, and the SBA may refuse to honor the lender’s guaranty purchase request, in full or in part. See SOP 50 57 2.
Conducting site visits often will ensure that lenders or CDCs remain up-to-date with the operation of the borrower’s business, and they facilitate prudent lending decisions. In some situations, the SBA requires lenders or CDCs to conduct site visits. If you are an SBA lender or CDC, the attorneys at Jimerson Birr can help you determine when a site visit is necessary, walk-you through the process, and can help you maximize recovery, as necessary.
- Brandon C. Meadows, Esquire
- Melissa Murrin, JD Candidate
Continued reading in the series:
- Which Liquidation Actions Require SBA’s Pre-Approval: Part 1 – SBA 7(a) Loan Liquidation
- Which Liquidation Actions Require SBA’s Pre-Approval: Part 2 – SBA 504 Loan Liquidation
- Classifying SBA Loans in Liquidation Status
- How SBA Lenders Ensure Expense Recovery in Loan Liquidation and Litigation
- Loan Modification and Deferment Requirements for SBA Lenders
- SBA Loans: How to Maximize Recovery by Liquidating Real Property