Sometimes family business can get in the way of a family business – or an SBA loan. I had a call from a lender with a prospect for a 504 loan who owned a hotel. It came out that the prospect’s brother-in-law owned a hotel in the same city. So I started down the path of doing my due diligence about the brother-in-law’s hotel when the lender stopped me.
LENDER. My prospect says that his brother-in-law has nothing to do with his business and demands that we leave him out of it!
ME. I wish I could. But we have to deal with the dreaded, “Affiliation by Identity of Interest.”
SBA requires lenders to identify as affiliates businesses owed by close relatives (spouse, parent, child, sibling or the spouse of a child or sibling) that are in the same or similar business as the loan applicant. We’ve identified the brother-in-law’s hotel as an affiliate. So you know what comes next: Get the last two income tax returns for the brother-in-law’s business.
I know. I know. It’s hard to ask, “Give me the tax returns on your brother-in-law’s hotel.” But we’re dealing with the rules of affiliation here. Affiliation affects size standards, and size is a threshold issue. If the business cannot prove that it’s small, there’s no Small Business Administration loan.
What’s the backup? Granted, nowhere does the SOP say that the prospect must ask his brother-in-law for his last two years of tax returns over Thanksgiving Dinner. But on page 120, it says, “SBA considers … identity of interest between close relatives…when determining whether affiliation exists.” SBA doesn’t care if your prospect and his brother-in-law aren’t talking to each other, or if they hardly ever see each other. SBA presumes that close family members have identical interests. So the businesses they own must be treated as one entity for size standards. It has nothing to do with how much one family member is involved in the other’s business. The affiliation is a result of the family relationship. And getting out of one’s family is no easy matter.
Is there a way around this? SBA recognizes that the presumption of affiliation may be rebutted. Let’s say a woman owns an accounting firm and her daughter owns an office supply store. The daughter started the store with her own money. Every now and then Mom buys supplies from the store, but the total amount of purchases is less than 10% of her daughter’s total sales. There are no other indications of affiliation. Therefore, SBA would probably say that the presumed affiliation has been rebutted.
While the presumption of affiliation by identity of interest may be rebutted, you need to become very familiar with your prospect’s business and those of his relatives. Then when you ask for the tax returns on the brother-in-law’s business, it will seem like the most natural request in the world. Naturally.
Hey! Let me know how this comes out. It hasn’t happened to me yet.
Senior Associate, CDC/504 Program
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