I'm reviewing a CRE term loan to a LLC, an entity formed to own the CRE property. The source of repayment is rents collected from the tenant, but the tenant is an affiliate and also a guarantor of the loan. In this case, would you take the gross sales/receipts of the tenant for the revenue amount? I really appreciate any help on this. Thanks!
Per the CRA Guide:
Generally, an institution should rely on the revenues that it considered in making its credit decision when indicating whether a small business or small farm borrower had gross annual revenues of $1 million or less. For example, in the case of affiliated businesses, such as a parent corporation and its subsidiary, if the institution considered the revenues of the entity’s parent or a subsidiary corporation of the parent as well, then the institution would aggregate the revenues of both corporations to determine whether the revenues are $1 million or less. Alternatively, if the institution considered the revenues of only the entity to which the loan is actually extended, the institution should rely solely upon whether gross annual revenues are above or below $1 million for that entity.
However, if the institution considered and relied on revenues or income of a cosigner or guarantor that is not an affiliate of the borrower, such as a sole proprietor, it should not adjust the borrower’s revenues for reporting purposes.
For a start-up business, the institution should use the actual gross annual revenue to date (including $0 if a new business has had no revenue to date). Although start-up businesses will provide the institution with pro forma projected revenue figures, these figures may not accurately reflect actual gross revenue and therefore should not be used.
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So,if you considered the revenues of the affiliate in the credit decision, those revenues are used for CRA reporting, plus the 0 for the borrower - which obviously results in the affiliate revenue.
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