The Lender must inspect the Collateral as often as necessary to properly service the loan. The Agency must give prior written approval for the release of Collateral, except as specified in paragraph (a) of this section or where the release of Collateral is made of Collateral under the abundance of caution provision of the applicable security agreement, subject to the provisions of paragraph (c) of this section. Appraisals on the Collateral being released are required on all transactions exceeding $250,000 and will be at the expense of the Borrower. The appraisal must meet the requirements of §4279.244 of this chapter. The sale or release of Collateral must be based on an Arm’s Length Transaction, unless otherwise approved by the Agency in writing.
Terms Used In 7 CFR 4287.313
- Appraisal: A determination of property value.
- Assets: (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
- Fair market value: The price at which an asset would change hands in a transaction between a willing, informed buyer and a willing, informed seller.
- Lien: A claim against real or personal property in satisfaction of a debt.
(a) Within the parameters of paragraph (c) of this section, Lenders may, over the life of the guaranteed loan, release Collateral (other than personal and corporate guarantees) with a cumulative value of up to 20 percent of the original loan amount without Agency concurrence if the proceeds generated are used to reduce the guaranteed loan or to buy replacement Collateral. Working assets, such as accounts receivable, inventory, and work-in-progress that are routinely depleted or sold and the proceeds used for the normal course of business operations, may be used in and released for routine business purposes without prior concurrence of the Agency as long as the loan has not been accelerated.
(b) If a release of Collateral does not meet the requirements of paragraph (a) of this section, the Lender must complete a written evaluation to justify the release and must obtain written Agency concurrence in advance of the release.
(c) The Lender must support all releases of Collateral with a value exceeding $250,000 with a current appraisal on the Collateral being released. The appraisal must meet the requirements of §4279.244 of this chapter. The cost of this appraisal will not be paid for by the Agency. The Agency may, at its discretion, require an appraisal of the remaining Collateral in cases where it has been determined that the Agency may be adversely affected by the release of Collateral. The sale or release of the Collateral must be at Fair Market Value based on an Arm’s Length Transaction, and there must be adequate consideration for the release of Collateral. Such consideration may include, but is not limited to:
(1) Application of the net proceeds from the sale of Collateral to the Borrower’s debts in order of their lien priority in the sold Collateral;
(2) Use of the net proceeds from the sale of Collateral to purchase other Collateral of equal or greater value which the Lender will obtain as security for the benefit of the guaranteed loan with a lien position equal or superior to the position previously held;
(3) Application of the net proceeds from the sale of Collateral to the Borrower’s business operation in such a manner that a significant improvement to the Borrower’s debt service ability is clearly demonstrated. The Lender’s written request must detail how the Borrower’s debt service ability will be improved; and
(4) Assurance that the release of Collateral is essential for the success of the business, thereby furthering the goals of the Program. Such assurance must be supported by written documentation from the Lender acceptable to the Agency.
(d) Any release of Collateral must not adversely affect the Project’s operation or financial condition.