Sometimes, new loan officers need help separating the wheat from the chaff, and they call us. The situation: Buffy and Duffy have formed B&D LLC, a new company that will operate a daycare. They have entered into a real estate purchase agreement for the commercial property only.

The property currently houses Jumping Jack Daycare, but the purchase agreement includes no provision for purchasing the existing daycare. Buffy and Duffy are not acquiring the seller’s operations, past, or present. Jumping Jack’s owners will dissolve that entity.

Buffy and Duffy hope to retain as much of the existing staff and current enrollment as possible. However, to increase profitability, they will institute a new curriculum, add staff and implement a new business model. Their financial institution has recommended an SBA 504 loan as the most affordable option. Sam, the CDC’s 504 loan officer, got the assignment. One look, and Sam called me:

SAM. Richard, I think this application is ineligible. Cash flow is good and credit is excellent. I anticipate no problem with collateral, and Buffy and Duffy are great people. But….

ME. I’m waiting for the other shoe to drop.

SAM. I’m double-checking SOP 50 10 7.1. On page 72, it says “For a change of ownership, the SBA Lender must verify the seller’s business tax returns or a sole proprietor’s Schedule C.” I don’t have the seller’s tax returns.

ME. Uh oh, Sam! Then the project is ineligible. SBA will determine that the project is associated with a business acquisition or change of ownership. Buffy and Duffy are purchasing the real estate of an existing daycare. And it will continue to operate as a daycare, regardless of the new business model. So you must verify the seller’s business tax returns.

SAM. Yeah. That’s what I was afraid of. I’ll  need to call up the sellers and ask for their business tax returns. But they’re not customers of the lender’s bank and we don’t know anything about them.

ME. Sam, I feel your pain. When I was an SBA 504 lender, I was often asked for information from business owners I didn’t know and unlikely ever to meet. All I can say is, “You get used to it.”

Well, Sam, I’m trying to be helpful. I imagine Jumping Jack’s owners are willing to provide whatever is needed to get the buyer’s loan approved. And the loan is closer to getting approval from your CDC than from anyone else, most probably. As long as the taxes are all right, there’s nothing to worry about. And if they’re not all right, you want to know now, before Buffy and Duffy get into a bad deal. So chill. Get the deal done. Or not.

Richard Jeffrey, Senior Associate
CDC/504 Program