SBA Tip # 8
The 90% Rule (as we like to call it)
By Stephen Mariani
If you have been following the SOP rule changes over the last few years you may have noticed this added:
The SOP Adds language similar to that found in the appraisal section describing requirements when a lender requires business valuation at closing (valuation estimate in loan application and Authorization) with stipulation that “a business valuation that supports the estimated value at time of closing” is required. At closing, valuation more than 90% of estimate, lender may close loan, but must provide written explanation as to why.
PLP lenders are permitted to close a loan when the business valuation is less than 90% of the estimated value but the lender must include a written justification as part of its file that may be reviewed by SBA at time of guaranty purchase or when SBA is reviewing the lender.
What you may find is that many lenders don’t utilize this rule. That’s right; they choose not to use the 90% exception when the business valuations come in slightly short. It is also very helpful to know that almost the exact same rule applies to commercial real estate appraisals and again we see lenders demanding the price be lowered to meet the appraisal amounts. We, at Diamond Financial, feel this is an underutilized SBA rule and cannot understand why every lender does not take full advantage of it. What we have a bigger concern about is that they demand the price be lowered and NEVER share this rule or option with the buyer or broker involved. They claim it to be lender policy when directly asked why by the informed brokers and borrowers. For the most part lenders would like you to think the SBA requirement hasn’t changed and still requires the appraisals and valuations meet the selling price to the dollar (or above).
So why is this so important to understand?
We monitor most appraisals and business valuations that come through our door and we find most land and building appraisals firms are relying on the last 3 years of values when producing the current values. This is where we see the majority of the differences; they are not considering the “before crash” values and are only relying on the recent reports. Knowing that many areas of the country are rebounding from the crash years we would expect for the appraisal firms to adjust accordingly. We’re not seeing it happen and appraisals are consistently coming in low. With this in mind there are ways to combat a portion of the shortfall on the appraisals, ask the lender to use the above rule and then determine if a shortfall still exists, many times it does not. Problem solved.
So let’s also look at the scenario that the above fix does NOT solve and there remains a shortfall. If it is the same seller on both the real estate and the business and he demands the same combined selling price for both, you might want to adjust the business portion of the loan request as the 90% rule also applies to that. Now what this rule has provided is two places to make up for shortfalls in third party reports and this is a favorable SBA rule. We want to point that out as there are so few.
TWO great solutions that we use and you should too. If the lenders you are working with choose not to utilize this rule, change lenders.
AskDiamond@easysba.com is always available for specific questions regarding this or other SBA rules.