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Policy Changes in the SBA SOP 50 10 5(H) that Impact Business Appraisals and Real Estate Appraisals

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May 12, 2015

By Neal Patel, CBA, CVA

The SBA has released an updated version of its Standard Operating Procedures (SOP) 50 10 5(H), which is effective May 1, 2015.  The following discussion highlights key revisions in the SOP which affect both business appraisals and real estate appraisals, along with the author’s comments.

Terminology

Throughout the SOP, the term “business valuation” has been replaced with the term “business appraisal”, in order to align with standard terminology within the lending industry.

Comment:

These terms are used interchangeably in the business valuation profession – for example, my professional designations include a Certified Business Appraiser (CBA) and a Certified Valuation Analyst (CVA) – each designation includes one of the terms.  I believe we will continue to see both terms being used in the lending industry.

Qualified Source

For required business appraisals of Non-Special Purpose Properties, the Accredited Business Certified Appraiser (ABCA)1 has been added to the “qualified source” list, which currently includes the following:

  1. Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers
  2. Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers
  3. Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants
  4. Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts
  5. Accredited Valuation Analyst (AVA) accredited through the National Association of Certified Valuation Analysts2

Comment:

1The ABCA acronym is incorrect – the correct designation is BCA (Business Certified Appraiser).  The SBA is aware of this and will eventually correct this typo in order to avoid confusion.

2Effective April 1, 2013, the AVA credential has been merged into the CVA, and lenders should recognize the AVA certification is no longer in existence.  It will likely be removed in the next SOP version.

Purpose of Business Appraisal

The previous SOP 50 10 5(G) stated:

“A business valuation assists the buyer in making a determination that the seller’s asking price is supported by historic operations and permits the buyer to make a reasonable return on his or her investment.”

The current SOP 50 10 5(H) has now modified this statement to:

“A business appraisal assists the buyer in making a determination that the seller’s asking price is supported by an independent qualified source.”

Comment:

This minor change in verbiage provides a more precise reason to order a business appraisal – although a business appraisal should include a purchase justification test which confirms that the buyer will make a reasonable return on investment, that is not the primary purpose of the appraisal – it is nice to see the SBA clarify this.

Special Purpose Property Appraisals

A Special Purpose Property is now defined in the SOP as “a limited market property with a unique physical design, special construction materials, or a layout that restricts its utility to the specific use for which it was built.” Examples of Special Purpose Properties include hotels, car washes, gas stations, bowling alleys and golf courses (a complete list of Special Purpose Properties is on pages 239-240 of the SOP).

For Special Purpose Properties, “the lender must obtain an independent appraisal performed by a Certified General Real Property Appraiser.” Additionally,

  • The appraisal must allocate separate values to the individual components of the transaction including land, building, equipment and intangible assets.
  • The Certified General Real Property Appraiser must have completed no less than four going concern appraisals of equivalent special use property as the property being appraised, within the last 36 months, as identified in the qualifications portion of the Appraisal Report.
  • Each appraisal assignment under this section must be… in compliance with current USPAP guidelines.

Comment:

The SBA did an excellent job addressing the special purpose property issue.  Rather than asking real estate appraisers to maintain a business appraisal designation (which is very rare), the SBA now requires a Special Purpose Property to be appraised only by those qualified real estate appraisers with extensive experience dealing with the special property type in question.

It is important to note that although Special Purpose Property real estate appraisals must be in compliance with USPAP guidelines, Non-Special Purpose Property business appraisals are not required to be USPAP-compliant.  Each business appraisal credentialing body has its respective appraisal standards that qualified sources must abide by.

In the rare case where a Special Use Property, such as a gas station or car wash, is operated from a third-party leased location (unaffiliated with the business) where real estate is not included in the transaction, it is my opinion that a business appraiser should be engaged, as real estate appraisers cannot appraise a business sans real estate.  I will be working with the SBA and appraisal organizations to clarify this in the near future.

Reporting Requirements for Commercial Real Estate

The SBA has made the engagement requirements similar for both real estate appraisals and business appraisals – they must both be prepared for the lender (client), and the lender may not use a business or real estate appraisal that was prepared for the applicant or the seller.

USPAP now only has two written report options for real and personal property assignments: Appraisal Report and Restricted Appraisal Report. Between these two options the SOP 50 10 5(H) states: “The appraisal must be an ‘Appraisal Report’ prepared in compliance with USPAP.”

Comment:

It is important to note that the SBA does not require business appraisals to be USPAP-compliant, although many firms (including ours) still compile reports that adhere to USPAP (either Appraisal Reports or Restricted Appraisal Reports).  As per USPAP, the scope of work required to develop credible assignment results is independent of the report format.  Additionally, the research and analysis required for credible results would be the same whether the appraiser prepared an Appraisal Report or a Restricted Appraisal Report to communicate the results.

Important Reminder: Transaction Type

In regards to business appraisals, the previous and current SOP states:

“The scope of work should identify whether the transaction is an asset purchase or stock purchase and be specific enough for the individual performing the business appraisal to know what is included in the sale (including any assumed debt).”

Comment:

The SBA Office of Financial Assistance has noted multiple cases where a business appraisal does not include the same assets and liabilities that are included in a proposed transaction, or even worse, the appraiser assumes an incorrect transaction type (stock vs. asset).

If the transaction type changes after the business appraisal has been compiled and prior to closing, the lender must request an updated business appraisal that mirrors the final deal structure.  Similarly, all assets and liabilities that are included in the final transaction must be included in the business appraisal.  This is similar to the basic concept of “comparing apples to apples”.  As many qualified business appraisers are unfamiliar with the SBA SOP guidelines, it is imperative that lenders understand this requirement and educate appraisers that they work with.  Ultimately, it is the lender’s responsibility to confirm that the business appraisal adheres to SBA guidelines.

Concluding remarks:

The SBA Office of Financial Assistance continues to make important updates to appraisal guidelines and is keen on making the process more streamlined and efficient for both SBA lenders and appraisers alike.  It is imperative that all parties understand and remain up-to-date with the effective SOP guidelines.

Neal Patel, CBA, CVA is the Principal of Reliant Business Valuation, a business valuation and equipment appraisal firm specialized in SBA related appraisals nationwide. He is a Certified Business Appraiser through the Institute of Business Appraisers (IBA), where he also serves on the Board of Governors.  He is a Certified Valuation Analyst through the National Association of Certified Valuators and Analysts (NACVA). Neal has extensive experience with small business valuations and financing, and firsthand ownership experience of multiple small businesses. You can connect with Neal at www.linkedin.com/in/nealpatelcba or visit www.reliantvalue.com.

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