I have recently written two different articles about making loans when the borrower holds the title as a family trust and a limited liability company. You can review both these articles under the “real estate finance” section on my website danharkey.com. You may also find other articles that may help further your education in real estate finance and trust deed investments.
There are different corporate entities, such as stock, non-profit, religious, public benefits. Usually, real property owners will hold title in either as a C corporation or an S corporation. A “C” corporation is a stand-alone entity, that expects to earn a profit. As a “C” corporation generates income and deductible expenses the profit will be taxes at corporate rates for both federal and state. This creates double taxation because shareholders will receive after-tax corporate distributions of profit, then is required to pay another round of taxes at their individual level on their personal tax return. An “S” corporation is referred to as a pass-through, where the profits are not taxed at the corporate level, but passed through to the individual stockholders, where they are taxed at the personal level by the individual. Smaller closely held corporate entities prefer the “S” for the elimination of the double taxation issue.
Loan Origination – Loan Application Process
The application package sent to the corporate borrower will contain forms related to an entity for all corporations, and possibly the individual for closely held s-corporate borrowers. A closely held corporation also referred to as a closed corporation, is a firm whose stock is held by a single or small number of people. In most cases, the individual(s) who create the S corporation is both the president of the company and the individual taxpayer for the pass-through entity. The S corporation will have financials, tax returns, checking and savings accounts. The individual will have separate but similar financials. The profit from the corporate entity will pass through to the individual taxpayer receiving a K-1 Tax Form and show he had the personal tax return as Schedule E Form 1040.
The underwriter will be responsible to identify the profit and available cash flow from both the corporate entity and the individual(s), including depreciation and pension contributions. The loan underwriting process is a hybrid of the two, even though the loan is a security instrument recorded against the property, and the individual(s) will become a personal guarantor(s) who will sign a separate guarantee.
- Business Entity Loan Application for the corporate entity.
- Business purpose Loan Application for the individual. Do not use a 1003 loan application which is designed for residential 1-4 federally related loans. This is for instances where the lender will request the officers of the corporation as individuals to provide an individual personal guarantee.
- Business Credit Authorization for the corporation some cases this requirement will be waived-applies as (1) above.
- Personal Credit Authorization for the corporate officer (2) above.
- Bank Statements of the corporation, and the individual. Sometimes, the individual statements may be waived.
- Year to Date Profit & Loss of the corp. or as an alternative individual.
- Corporate Balance Sheet-same as above.
- Disclosure regarding insurance requirement, authorization for the insurance agent or representative to communicate and provide the lender with requested information regarding coverage.
- 8821 Tax Information Authorization.
- 8821 tax information authorization if required. This form allows the IRS to disclose your confidential tax information to the person that is appointed, the lender representative. The completion of the form may be voluntary be the borrower but required by the lender. The completed form with be sent to the IRS, who will send the tax return to the appointed party. Certain lenders may have this requirement.
- 4506-T request for a copy of a tax return. The purpose is to allow the lender to retrieve past tax transcripts. The document must be signed and dated by the taxpayer or President of the Corp that will give a third-party lender permission to retrieve requested data. Certain lenders may wave this requirement.
For the purpose of completing a loan transaction here is a list of the requirements that the processor and underwriter need to be concerned. What needs to be proved up is that the corporation exists, has been filed correctly, is in good standing, records are kept up to date, and the borrower representative(s) has the full authority to sign on behalf of the corporation.
1. Certified copy of the Articles of Incorporation, including any amendments, from the Secretary of State.
- Request a certified copy of the Articles from the Secretary of State.
- The Articles will tell you the name of the corporation, its purpose, the addresses of the corporation, and minor information on stock, etc.
- Request a good standing letter (Certificate of Status) from the Secretary of State. If the corporation is not in good standing, do not make the loan.
- A foreign corporation is created in a state other than California but desires to be approved to operate within the state jurisdiction. If the entity is a foreign corporation, get a certified copy of the Certificate of Status from the California Secretary of State of the form entitled Statement and Designation by Foreign Corporation (or some earlier version of that document) showing that the foreign corporation has registered with the State of California, and is qualified to do business in the State of California. If the foreign corporation is not approved, do not make the loan.
2. Get a certified copy of the most current filed Statement of Information from the Secretary of State. This document will reveal the main officers and addresses of the corporation, the names, and addresses of the directors, and the type of business, among other things, as of the date the Statement was signed, but it is not conclusive who can sign for the loan. Only the complete, as amended, by-laws and current resolutions from the board can determine who is authorized to sign.
3. Get a copy of the By-Laws, certified by the secretary of the corporation, including all amendments.
- If you want to go above and beyond, get the Certificate signed by all shareholders that the By-Laws, including any amendments, is current and complete as attached to the Certificate.
- Review the powers and authority sections of the By-Laws, along with the Articles of Incorporation, as amended, to determine who is authorized to sign for a loan, and whether there are any limitations on the type or amount of loan that can be obtained, or if there is a requirement for additional signatures. For example, there may be a limitation on encumbering all assets of the corporation without shareholder approval.
4. If you have concerns, you can get a certified copy (by the Secretary) of the original minutes of the first organizational meeting of the corporation. This will, or should, show you who was issued shares of the corporation who the original officers were, and who the original directors were.
5. Get a notarized, signed under penalty of perjury, Certificate of Incumbency and Representations affirming who are the officers, directors, and shareholders, who are authorized to act on behalf of the corporation and affirming certain other matters, such as lack of litigation affecting the property or corporation. This form should be signed by all current shareholders and certified by the secretary, thus having them all agree that the parties set forth in the Certificate are the authorized parties to sign the loan documents and agreeing to certain other matters.
6. Get Borrower’s Opinion of Counsel Letter if a loan is significant or complicated.
- If the loan is complicated or is in a large enough sum, or if you want to add additional safety to the transaction, then it may be prudent to get an opinion of the borrower’s counsel. This opinion discusses and opines as too many things, most often including the legal capacity of an individual and signatories, the proper formation of the entity, authorization and authority to deliver and execute the loan documents, lack of conflict with other contracts, judgments, orders, etc. to which the entity is a party or bound, lack of litigation, “no usury” representation, enforceability of the loan documents, and many other possible representations. It should be addressed to the lenders AND TO THE BROKER for reliance purposes. This letter is a welcome back-up to your own investigation of the authority of the signatory and as to other matters addressed in the letter.
7. Get a Resolution from the Board of Directors and certified by the Secretary of the corporation allowing the Corporation to borrow the funds represented by the Loan Documents and allowing and directing the person signing the documents to sign them.
- Determine who must sign the loan documents.
8. From the documents above, you should be able to determine who your proper signatory is.
9. There are certain presumptions, found in Corporations Code section 313, regarding parties signing on behalf of the Corporation. The presumptions validate the authority of the persons or entities listed, acting on behalf of the Corporation. The actions are valid unless the third party (here, the Lender) has actual knowledge of the lack of authority of the signer. These presumptions are found in sections 313. These provisions state:
- 313. Subject to the provisions of subdivision (a) of Section 208, any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof, executed or entered between any corporation and any other person, when signed by the chairman of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge by the other person that the signing officers had no authority to execute the same.
If you have one of the following: Chairman of the Board, President, Vice-President, and one of the following: Secretary, Assistant Secretary, Chief Financial Officer (or Treasurer), or Assistant Chief Financial Officer (or Assistant Treasurer), you will have the benefit of the presumption of authority. This is a good thing. Get the two signatures, one from each group, and you have done a good job of securing the authority to sign.
10. Confirm who has authority as presumed under section 313.
- To confirm the authority of the authorized signatory under the Code, then you should review the following documents, after having satisfied yourself to the best of your ability that the documents are accurate and current.
- Review the Articles of Incorporation, the By-Laws, and the Statement of Information (remember, the SOI is not determinative of who may sign). The current organizational documents (By-Laws and Articles of Incorporation) will tell you who has the authority to sign.
11. Get a notarized Certificate of Incumbency under the penalty of perjury signed by all Shareholders, Directors and Key Officers (president (CEO), secretary, CFO (treasurer)) as listed in the By-Laws and Stock Ledger, (as it may be amended) filled out in the hand of the shareholders or secretary, certifying:
- That they are the only shareholders, officers, and directors of the corporation.
- The corporation is fully and validly organized, existing, and in good standing under the laws of the State of California.
- The By-Laws attached to the Certificate of Incumbency is the By-Laws in effect and governing the corporation.
- The By-Laws have not been amended, superseded, or, or, if they have, that all such changes are attached to the original By-Laws and the Certificate.
- There is no litigation pending or threatened against the corporation.
- The principal address of the corporation.
- The corporate number as issued by the Secretary of State of California.
- The telephone number and email address of all shareholders, officers, and directors.
- That the officers/directors listed in the Certificate have full authority and power to encumber the real and personal property of the corporation, with no further requirements or consents from any other party or entity (then list the parties with such authority), citing to the provisions of the By-Laws that give them such authority (then, check the section of the By-Laws giving them such authority and read it to make sure it says what they say it says).
- Agreeing that the Loan Documents, when signed, will make up a valid, legally binding obligations of the Borrower and will be enforceable against the Borrower under their respective terms.
12. How are the parties to sign?
When corporation signs, have the President and the Secretary (or two others, one from each group as discussed above) both signs.
A typical corporate signature block looks as follows. There should be little reason to vary from this standard. Again, TWO signatures, not just one.
A California corporation,
As with all entity loans, prepare escrow instructions with an authorization for the escrow/title company to close ONLY when the escrow has determined that the loan documents have been properly signed by all required parties authorized to sign.
Business and Private Money Finance Consultant
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