SBA Area Office Double Counted Revenue in Denial of 8(a) Application, Says OHA

SBA sometimes makes mistakes in the 8(a) application process, but the appeals process may be able to remedy those miscues. Recently, an applicant appealed the SBA’s denial of her 8(a) status based on net worth. She argued that the SBA Area Office had double counted the value of her rental property, which automatically disqualified her from being found economically disadvantaged.

SBA’s Office of Hearings and Appeals (OHA) agreed and remanded the denial decision.

When the applicant in Spectrum of Floors, LLC, SBA No. BDPE-580, 2020 (Jan. 14, 2020), first applied for admission to the 8(a) Business Development Program, she co-owned three rental properties. Based on the total fair market value of those rental properties, SBA’s Area Office found that the applicant was not economically disadvantaged under 13 C.F.R. § 124.104(c)(2).

SBA explained, “for initial entry into the 8(a) BD program, the net worth of the individual claiming disadvantage cannot exceed $250,000, once certain exclusions are deducted.” And it denied the applicant 8(a) status on the basis that her total value exceeded this threshold amount.

The applicant requested SBA’s reconsideration. In her request, she told SBA that she had recently sold one of the rental properties but still co-owned a loan asset reflecting proceeds from the sale. So, SBA recalculated the applicant’s net worth. SBA added the loan asset from the sale as a new “Accounts & Notes Receivable,” but retained the same calculation of the three rental properties’ total market value that it previously used. Accordingly, SBA denied her request for reconsideration on the same basis that it denied her initial application.

The applicant appealed the SBA’s denial to OHA. She alleged that the SBA Area Office had double counted the value of her recently-sold rental property by including both her interest in it’s market value and her interest in the loan asset from the sale in its calculations of her net worth.

In response, SBA defended the reasonableness of its denial based on the applicant’s failure to establish economic disadvantage. SBA claimed that it did not know what portion of the applicant’s original rental properties’ total value had been reduced by the property’s sale. So, it used the original total the applicant provided. SBA also argued that the applicant had not entirely disposed on of the asset but merely converted it to a cash loan.

In reviewing the SBA Area Office’s denial, OHA explained the applicable standard of review as follows:

In an an appeal of an 8(a) BD eligibility determination, OHA’s task is to ascertain whether SBA reached a reasonable conclusion in light of the facts available in the administrative record. OHA may remand a matter for further review “where it is clearly apparent from the record that SBA made an erroneous factual finding (e.g., SBA double counted an asset of an individual claiming disadvantaged status)”.

Upon review of the record, OHA found that the applicant had “convincingly shown that SBA double-counted the value of [her] interest in the [recently-sold rental] property in determining her adjusted net worth.” And OHA found that this error was “material to the outcome of this case” because it might have affected whether the applicant’s adjusted net worth exceeded the allowable $250,000 threshold.

According to OHA, SBA accepted that the property was sold when it included the new “Accounts & Notes Receivable” loan asset from the sale in its net worth calculations. And SBA acknowledged that the applicant held interests in just two rental properties (rather than the original three) after the sale as well.

But SBA applied the combined fair market value of all three of the applicant’s original rental properties in its net worth calculations, nonetheless. Thus, OHA found that SBA double counted the value of the recently-sold rental property by including it in the total value of the rental properties while also adding a new loan asset from its sale.

In response to SBA’s claim that it did not know what portion of the total value had been reduced by the property’s sale, OHA explained that the applicant “did provide property-by-property information about the fair market value of [her] interests,” and had submitted documentation supporting the claimed amounts. OHA said, “[g]iven this record, SBA has not persuasively explained why no reasonable adjustment of the [original] total would have been possible.”

Lastly, in response to SBA’s claim that the applicant had not fully disposed of the asset but had, instead, converted it into a cash loan, OHA found:

While I agree that SBA correctly viewed the loan as an asset of [the applicant], the issue here is not whether the [rental] property should have been excluded altogether from SBA’s analysis, but whether this asset was, in effect, double-counted.

OHA concluded that SBA’s decision denying the applicant admission to the 8(a) Business Development Program “appears to have been predicated on a material factual error.” And it granted her appeal and remanded the matter to SBA for further review consistent with its decision.

So what’s the takeaway here? If you are denied 8(a) status, make sure you personally review the record of your application decision. It can be discouraging to face denial after denial. But this case demonstrates that it can be worth it to be persistent and question the outcome.

For assistance with your 8(a) application and/or denial, email us or give us a call at 785-200-8919.

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