We have a Corporation that borrowed funds to purchase another business. The underwriting delineated the combined revenues of the Corporation AND the "new" business (as delineated in the credit approval) (based on the gross sales on the the business's tax return) as the gross annual revenues. Based on the CRA, it was my understanding, if pro forma data is used, we would report either $0 or the actual amount earned at the time of the loan application. I believe the amount shown on the new business tax returns would be projections or pro forma data for the existing Corporation (borrower), and therefore should not t be factored into the GAR that we would report on the CRA loan register, in spite of the fact that it was used to render the credit decision. I would appreciate your perspectives.

Only historical data is appropriate for the GAR answer. No projected revenues.

Thank you! They are using the prior owner's historical data (as depicted on the tax returns). If I understand you correctly, it should "not" be denoted as GAR for the new loan. Thank you again!

If the business continues (purchase of stock) then the old revenues would be appropriate. But if the transaction was an asset purchase and a new corporation was established then no historical data would apply to the new corporation.

Len, To further clarify my follow-up question. I understand that a "startup", unlike a existing business would not have historical information. To confirm, were you suggesting that we can use the historical revenues of an existing business that is being purchased, particularly if the underwriter used it in rendering the credit decision.

I was viewing the historical information as a projection and therefore, questioning whether it should be included in the GAR.

Thank you again!

If you are lending to a corporation that has history and you rely on those revenues then you have GAR. If you are lending to a new business formed to acquire the assets of another business, the new company has no history and no GAR

Another question...

If the new business was formed to acquire assets of another business, and the Bank used an affiliate's GAR to render the credit decision, would we report the affiliates revenues or only the GAR earned to date for the newly formed business?

If the affiliate guaranteed the loan and you relied upon the affiliate's statement of revenues then you would include the affiliate's GAR and the business to which you extended the loan has no GAR because it was formed to acquire the assets so it has no history.

if the affiliated business does not guarantee the loan, then you would not report their income.

If the new business has some personal guarantees, would you include their individual incomes?

Thanks in advance - we are moving up and learning as we go.

and sorry- additional question
if the business does have income, then do add any guarantor income to that? Or just use the business income?

Business that does not guarantee loan - GAR is irrelevant
Personal guarantees don't affect GAR

thank you very much.

A real estate investment company is purchasing a commercial building that is currently occupied by a tenant. We have signed leases denoting rents for 1st and 2nd floors currently being paid and a letter from the tenant committing to rents for the 3rd and 4th floors in the subsequent year. The historical rent along with the anticipated rent were used in the credit decision. From a GAR perspective, I believe we should only report the historical rents paid for the 1st and 2nd floors and not the projected rents for the 3rd and fourth floors, regardless of the fact that they were used in the underwriting decision. Thoughts?

Thank you!

You never use projected revenues. The only legitimate revenues for GAR are actual historical revenues.

@Len S - You don't believe the statement about new businesses overrides the statement about affiliates?

[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.]

[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.]

I take these as mutually exclusive statements such that if a brand new start-up is the borrower, then you would report $0, regardless of affiliate involvement.

The critical issue in this situation is, "did you rely on the GAR of an affiliate that guaranteed the loan"? If you lend money to a start up and you rely on the GAR of the affiliate that guaranteed the loan, the appropriate GAR to report would be the GAR you relied upon which would be 0 for the start up plus the GAR of the affiliate that guaranteed the loan. This means you would report the GAR of the affiliate in the case.

You refer to a statement in the CRA Guide to a start-up situation in which there is no mention of an affiliate that guarantees the loan. In that case the GAR is 0. If you look at 2 paragraphs above the paragraph you refer to you would see the clear statement that when an affiliate guarantee is involved you would include that GAR in the GAR to be reported.

"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."

The Guide is very clear that if you relied upon the GAR of an affiliated guarantor, you include that GAR in all such situations. I see no conflict whatsoever with the statement about start-ups.