If you have ever studied Philosophy, you have run into Diogenes. Even if Philosophy wasn’t in your study plan, chances are you’ve seen paintings depicting Diogenes as an older man, holding a lantern as he searched for an honest man. Story is that he never did find one. I guess the lantern was no help. I thought of Diogenes the other day when I got a call from Mike. A lantern couldn’t have helped him either.
Mike is the manager of a good-sized SBA loan department that has been around for quite a while. He had a prospect for an EPC/OC SBA loan. And he knew that the rent an EPC charges an OC cannot exceed “… the amount necessary to make the loan payment to the Lender and an additional amount to cover the EPC’s direct expenses of holding the property, such as routine maintenance, utility expenses, insurance, and property taxes.” (SOP 50 10 7 page 26).
He remembered some sort of SBA rule saying that the referenced additional amount couldn’t exceed 1.25X the debt service, but he couldn’t find it in the SOP. Mike wondered if it’s one of the clauses that was taken out when the new SOP was issued, and if it would be part of the yet-to-be-issued technical corrections. He added that his district office used to be very strict about that rule.
Here’s the Scoop: “Do What You Do.” Mike couldn’t find that rule because it’s not in the SOP. Never was. In fact, the new SOP won’t help with that, or many other issues lenders have relied on for SBA guidance. SBA will deal with eligibility issues but honestly, regarding how much rent Mike’s customer can be charged, the guidance is there, right on page 26: P&I plus an “… additional amount to cover the EPC’s direct expenses of holding the property …” After that, it’s up to the SBA lender to determine compliance.
There are dozens of other instances where the SOP provides no additional guidance. In this, and the other cases, SBA expects lenders to use the new “Do What You do” rule. Best practice: The lender needs to incorporate what it does within its loan policy. If Mike really wants to limit the rent the EPC can charge to X Times P&I, he can put it in his loan policy.