So the SBA made some changes to their “Standard Operating Procedures” this last year. However, it really caused some chaos in the process…..probably unintended, but still chaos. At first they made some changes…then they changed those changes…then they altered some of the changes they changed…then they did a final draft…then they rewrote that final draft to where we are today. Are you thoroughly confused yet? Good, because I’m confused just writing this.

So at the beginning of the summer when we started underwriting this physical therapy clinic in Alaska the SBA altered their policy on amortization as it pertains to real estate and the banks interpreted this as the following: From now on as long as there was a real estate component to the acquisition we could amortize the whole loan over 25 years! Great, so that is what we did. The acquisition of the business was $1.65M and the real estate was $800K. When we ran the numbers it cash-flowed like a dream on a 25-year amortization.

Then, at a meeting in Florida a few weeks later, the SBA announced that you could not amortize the whole deal over 25 years even if real estate was 51% or more of the transaction. It was the bank’s choice of either a blended rate between business and real estate, or 25 years for real estate and 10 years for the business. Ok, the problem with that is we underwrote the deal based on 25 years for the whole project and now it did not cashflow properly at a blended or separate 10/25 year amortization!

Wow! So this really put us in a predicament because we had already issued a contingent committed to the borrowers. We based our decision on our interpretation of what the SBA had told us and it was not clear. So we had a big decision to make. Do we kill the deal or do we honor our commitment? We felt killing the deal would not be the right thing to do to our borrowers considering it was not their fault in any way. We kept our word, and even with the lighter cash-flow coverage, we kept the ball rolling.

Now on a separate matter, to add insult to injury, the real estate appraisal actually came back much lighter than what the seller had predicted it would be. So now the seller was not willing to part with it at that price. Now, they figured they would just sell the business and lease the building to the new owners even though that is not what they wanted to do. The problem with that is we had to go down to a 10-year amortization for just the business at $1.65M and that brought down our debt coverage even more. Well, we just kept going because we had faith in the couple that was buying this business and they deserved to have this business!

Now we love the SBA, and we are so lucky to have it in this country, as it really plays a pivotal role in the business community. However, when changes in the program are made they really need to be more direct and not cause confusion among banks and borrowers. As you can see in just this one example, how many lives it affects in the process. However, in the end we got it done and closed and that is all that matters now!