SBA Lending and Appraisal Insights

I recently taught a workshop titled Navigating the Appraisal Process at the 4^th Annual SBA Lender Conference in Minnesota. Continuing the theme from last month, this article highlights some key terms and thoughts about going concern value and specific U.S. Small Business Administration business and real estate appraisal requirements. I presented some ideas to help lenders, banks reviewers and appraisers.

Going Concern Value – The market value of all the tangible and intangible assets of an established and operating business with an indefinite life, as if sold in aggregate; more accurately termed the market value of the going concern.

• The value of an operating business enterprise. Goodwill may be separately measured but is an integral component of going-concern value when it exists and is recognizable.
• The going concern valuation includes certain assets of the business enterprise including real property, FF&E, and business value.
• Examples include gas stations, assisted living, restaurants, hotels, etc.

SBA – Real Estate Appraisal Requirements

Commercial Real Estate

SBA requires a real estate appraisal if the SBA-guaranteed loan is greater than $250,000 AND is collateralized by commercial real property.

• For all loans greater than $250,000, secured by commercial real property, federally regulated lenders must obtain an appraisal by a state licensed or certified appraiser and otherwise follow their primary regulator’s FIRREA requirements for real estate appraisals. Appraisals must be in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). The SBA or the lender may require an appraisal of real property by a State licensed or certified appraiser in connection with a loan for $250,000 or less, if such appraisal is necessary for appropriate evaluation of creditworthiness.

The appraiser must be:

1. independent and have no appearance of a conflict of interest (such as a direct or indirect financial or other interest in the property or transaction); and
2. either State-licensed or State-certified with the following exception: when the commercial property’s estimated value is over $1,000,000, the appraiser must be State-certified.

Real Estate Eligible for SBA Loans

• Businesses such as barber shops, hair salons, nail salons, and similar types of businesses are eligible, regardless of whether they have employees or contract with individuals to provide the services.
• Hotels, motels, recreational vehicle parks, marinas, campgrounds, or similar types of businesses are eligible if more than 50% of the business’s revenue for the prior year is derived from transients who stay for 30 days or less at a time.

Real Estate Eligible Uses of Loan Proceeds

SBA Guaranteed Loan Proceeds May Be Used To:

1. Acquire Land and/or purchase, construct or renovate buildings;
2. Improve a site (e.g. Grading, streets, parking lots, landscaping), including up to 5 percent of the loan amount for community improvements such as curbs and sidewalks;
3. Energy Conservation loans; or
4. Refinancing

Requirements When Leasing Part of a Building Acquired with SBA Loan Proceeds

1. Amount of rentable property that can be leased:
2. a) For an existing building, a small business must occupy 51% of the rentable property and may lease up to 49%; and
3. b) For new construction, a small business must occupy 60% of the rentable property, may permanently lease up to 20% and temporarily lease an additional 20% with the intention of using some of the additional 20% within three years and all of it within 10 years.
4. c) An Eligible Passive Company (EPC) must lease 100% of the rentable property to an OC. The OC must follow items a) and b) above.
5. d) Circumstances may justify allowing the SBC a period of time after closing of the SBA loan to comply with the above occupancy requirements. For example, a pre-existing lease may have a few more months to run. In no case may the small business have more than one year to meet occupancy requirements.
6. e) The restrictions in a) and b) above apply regardless of whether the rentable property is leased to a commercial or residential tenant.
7. f) The applicant may not use loan proceeds to improve or renovate any of the Rentable Property that is leased to a third party

Real Estate Not Eligible for SBA Loans

• Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies) are not eligible.
• Land Subdivisions
• Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible, e.g. shopping centers.
• Apartment buildings and mobile home parks are not eligible.

Next are a few triggers that require a business appraisal. Thanks to Brandon Hall, Owner of BGH Valuation, http://www.bgh-valuation.com/  for his help in this piece.

Business Appraisal Requirements

Non-Special Purpose Properties

1. If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment being financed is $250,000 or less, the lender may perform its own valuation of the business being sold, unless the lender’s internal policies and procedures require an independent business appraisal from a qualified source.
2. If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment is greater than $250,000 or if there is a close relationship between the buyer and seller (for example, transactions between family members or business partners), the lender must obtain an independent business appraisal from a qualified source.

A “qualified source” is an individual who regularly receives compensation for business valuations and is accredited by one of the following recognized organizations:

• Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers;
• Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers;
• Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants; and
• Certified Valuation Analyst (CVA) or Accredited Valuation Analyst (AVA) accredited through the National Association of Certified Valuation Analysts.

A “Special Purpose Property” is a limited market property with a unique physical design, special construction materials, or a layout that restricts its utility to the specific use for which it was built.

• When the loan financing any portion of the acquisition of a business is over $250,000 or if there is a close relationship between the buyer and seller (for example, transactions between family members or business partners) and the business operates from a Special Purpose Property, the lender must obtain an independent appraisal performed by a Certified General Real Property Appraiser.

• The appraisal must allocate separate values to the individual components of the transaction including land, building, equipment and intangible assets.
• The Certified General Real Property Appraiser must have completed no less than four going concern appraisals of equivalent special use property as the property being appraised, within the last 36 months, as identified in the qualifications portion of the Appraisal Report. Generally speaking, the particular area of expertise for the Certified General Appraiser is the real estate component.

Mitchell Simonson, MAI is an expert commercial real estate appraiser and investor. For more specific questions or clarifications, please contact Mitchell Simonson, MAI at mitch@simonsonap.com or 612-618-3726.