This issue has come up during recent client loan reviews. So it’s worth addressing here. We often see hotel/motel acquisitions treated as commercial real estate purchase transactions. Yet SBA considers them business acquisitions with real estate and business personal property as collateral when lenders are considering financing the purchases with SBA 7(a) loans.
No Room for Error. Failure to perform the proper eligibility analysis (change of ownership) or to require the appropriate injection has serious consequences including possible denial of your guaranty if the loan defaults. It’s important to remember that all change of ownership SBA requirements apply when considering structure, performing analysis, preparing the Authorization (delegated lenders) and closing your loan. Some specifics:
- As with change of ownership, a seller may not remain as an officer, director, stockholder or key employee. They may stay on as a consultant for 12 months maximum under a consultant agreement.
- Seller’s tax returns and interim financials must be collected and signed by the seller. Verify the returns via 4506-t prior to closing.
- A site visit must be performed and documented with the date and comments in your file.
- Because hotels are “special purpose properties,” the business valuation may be in the form of a going concern real estate appraisal by a Certified General Real Property Appraiser who must have completed four (4) or more going concern appraisals of equivalent special use properties within the last 36 months. They must also meet all other applicable appraisal requirements in the SOP. *
- Change of ownership resulting in a new owner requires an equity injection of at least 10% of the total project costs. All equity injection sources, proof and standby requirements as cited in the SOP apply. **
- SBA Form 1920, and subsequently the SBA Authorization, must both reflect the loan as a change of ownership. Further, the Authorization boilerplate allows for Change of Ownership best practices. We recommend adhering to them to ensure that the transfer of ownership follows state law (e.g., Purchase-Sale Agreement, Bulk Sales or Transfer, Non-Compete, just to name a few).
- Finally, your closing instructions to the Closing Attorney or Escrow Company should reflect your requirement that all necessary steps be taken to ensure the sale is clear of any seller liabilities.
Important Reminder. Let’s say an appraisal states that the going concern is valued at $2 million, but then it’s broken down to RE valued at $1.8 million; Business Property at $200,000 and Goodwill at $0 or some other breakdown. Many lenders tend to list the real estate value at $2 million. This as a common error! Remember to list the actual real estate value, rather than the entire value of the going concern.
There you have it. Time to make room for hotel/motel purchases in your SBA portfolio.
* SOP 50 10 5 (K) Subpart B, Chapter 4, IV., pgs. 201-205
**SOP 50 10 (K) Subpart B, Chapter 2, III., V. H., pgs. 139-142; Subpart C, Chapter 2, IV., K., 1., pg. 322. L., pg. 323; Chapter 3, II., pgs. 327-328