Equity Ownership Calculation under SBA Loans

searcher profile

March 25, 2024

by a searcher from University of Pennsylvania - The Wharton School in Austin, TX, USA

How does the SBA calculate the equity ownership for each investor when there is a participating preferred equity in the structure? Trying to figure out if the 20% rule for the preferred investors takes into consideration only their percentage of the common or their percentage of the common plus their preferred equity?

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commentor profile
Reply by a lender
from University of North Carolina at Wilmington in Wilmington, NC, USA
Hey Adel! This is a bit of a gray area and certain banks have different procedures/perspectives. At Live Oak we are testing the economic interest of the owner over the course of the loan. So if the investor has effective or converted ownership greater than 20% a PG will be required. We chat about this on our Wednesday weekly office hours and have a worksheet built that test the effective ownership. Happy to share both. Just email me at redacted ^redacted‌ can help too!!
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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I concur with Sarah, it differs from Bank to Bank what they will accept. What we have seen buyers do to avoid the issue is setup the equity ownership interest so that the change in ownership at or above 20% cannot happen until the SBA loan is repaid, in which case the lenders are typically good with it.
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