March 29, 2018






Use of New Forms 1919 and 1920 

At the end of February, NAGGL was given the new Forms 1919 and 1920, which had been updated to reflect SOP 50 10 5(J) policies, and asked to share them with our members. There was a delay in posting the forms on sba.gov while they were made ADA compliant. Both forms have been available on CAFS and the forms now are available at sba.gov. SBA has not announced a date on which use of the new Forms 1919 and 1920 will be mandatory, but is asking lenders to convert as soon as possible to use of these new Forms 1919 and 1920. (We have been told that most third-party providers have completed conversion to the new forms.)

 

How do I know which is the current form? The date indicator is in the footer on each form which carries the form name followed by (01/18)
Be careful -- searching for any SBA Form will often bring up obsolete forms!

 

Links to the forms on sba.gov:

Landing page >

SBA Form 1919 >

 

The SBA Form 1920 landing page erroneously states at the top "Effective October 1, 2017" -- however, if you download the PDF, it is the correct form.  (SBA is aware of the discrepancy.)

 

The direct link to the Form 1920 does not work, so go to the landing page and click the large green box reading Download .PDF


 

Is it a Business Acquisition or Commercial Real Estate Transaction?
Equity injection

Q: In the new SOP, business acquisition deals require a 10% injection and a seller carry can be only half of this injection as long as it is on full standby for the length of the SBA loan.  

 

On a gas station C-store purchase, we are losing deals because we consider this type of transaction a biz aq (because the business is open and the new owner will continue the same business – maybe the new owner will  have a new entity or even a new brand of gas, but it is the same business) and so we follow the above equity injection rule. Another bank is calling the same situation a real estate purchase and therefore not requiring an equity injection.  
 
This just doesn’t seem to be right to me and is not in the spirit of the SBA requirement. Thoughts?

 

A: NAGGL agrees that loans done under the circumstances that you described should properly be considered to be change of ownership loans and therefore subject to SBA’s mandate that there be a minimum equity injection of 10% of the total project costs.  

That position appears to be fully supported by specific language in the SOP related to changes of ownership via asset purchases. Per SOP 50 10 5(J), page 132:  “An asset purchase will be deemed a change of ownership and must comply with all of the requirements of this paragraph if the Applicant(s) is purchasing all or substantially all of the assets of the Seller’s business and is continuing the operations of the Seller’s business.”  So, especially given that language, even if a business is re-branded as part of the transaction, we do not think that would allow a lender to say that the transaction is nothing more than a real estate purchase. Rather, we believe that SBA would regard the transaction as a change of ownership and would expect the lender to comply with the new mandatory equity injection requirements.    

But, even if SBA agreed that the transaction was not a change of ownership, we think that it would be difficult for a lender to argue that no equity injection was required. The rationale for that position is that, unless the applicant was an existing business, the purchase of the real estate would have to be regarded as part of a start-up, so we believe that the same 10% equity injection would apply. [This would be especially true of any of the loan proceeds were going for any purpose other than the real estate purchase.]

In addition, even if the transaction was not deemed to be either a change of ownership or a start-up, it is important for lenders to remember that per both SOP and, particularly SBA regulation 13 CFR 120.150(f), lenders are required to determine that there is “sufficient invested equity” in every transaction. So, even when the SOP does not require a specific injection based on the proposed categorization of the use of loan proceeds, SBA expects lenders to determine on a case-by-case basis whether there is enough equity in the entity to warrant the provision of SBA financing. And, here it is important to note that the cited regulation is not new. Although it has not been stressed until recently, it has been an SBA requirement for many years.  

Finally, based on NAGGL’s conversations with SBA over many years, including since the issuance of SOP 50 10 5(J), we strongly believe that SBA will be very suspicious of any transaction where lenders appear to be trying to circumvent the intent of SBA requirements regarding equity.  In fact, given the spotlight that has been focused on this issue, we expect that SBA’s Offices of Credit Risk Management and the Inspector General, as well as the SBA purchase centers, will be subjecting this issue to a heightened level of scrutiny for at least the foreseeable future.  




 

Advanced Notice of Proposed Rulemaking

Small Business Size Standards; Alternative Size Standard for 7(a), 504, and Disaster Loan Programs


SBA is seeking public input to assist in establishing a permanent alternative size standard for its 7(a) and 504 Loan Programs. Comments are due by May 21. Read more here >

 




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