Kent Appraisal Group, No. MSB-514 (June 30, 1995) Docket No. MSBE-94-9-26-42 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ______________________________ ) IN THE MATTER OF: ) ) Docket No. MSBE-94-9-26-42 Kent Appraisal Group ) ______________________________) APPEARANCES For the Petitioner: For the Agency: Carrie M. Rodriguez John T. Spotila, Esq. Kent Appraisal Group General Counsel Park Place Katherine C. Power, Esq. 604 Ringling Road Agency Representative Crystal Lake, IL 60014 Small Business Administration 409 Third Street, SW Washington, DC 20416 DIGEST Under 13 C.F.R. 124.104(c)(1) and (d)(3), an applicant concern or any individual employed by the applicant concern must have the requisite license(s). However, one nondisadvantaged individual providing a critical license may not possess control or the power to control the applicant concern if the concern has the ability to perform its business activities without that particular individual. When the facts presented show that a nondisadvantaged minority stockholder holds a license necessary to the applicant concern but not fatal to its ability to exist and retain business then a finding by the Agency that the nondisadvantaged individual controls or has the power to control the applicant concern is arbitrary and capricious. FINAL DECISION June 30, 1995 ARKOW, Administrative Law Judge: Petitioner Kent Appraisal Group (Kent), a real estate appraisal firm, is appealing a decision by the Respondent U.S. Small Business Administration (SBA) denying it entry into the 8(a) Program[1] because a nondisadvantaged individual controls or has the power to control Kent. The basis for this conclusion is that the nondisadvantaged individual holds a critical real estate appraiser's license and the firm cannot operate in the appraisal industry without that license. Kent claims the SBA's conclusion is arbitrary, capricious, and contrary to law. I agree with Petitioner. Jurisdiction Jurisdiction on appeal is properly based on 15 U.S.C. Section 637(a)(9) and 13 C.F.R. Parts 124 and 134 and was timely filed under 13 C.F.R. Sections 124.210(b) and 134.11(a)(7). Issues Whether Kent's nondisadvantaged partner, Rolf Tweeten, controls or has the power to control Kent because he is the only partner who possesses a real estate appraiser's license. 13 C.F.R. Section 124.104(d)(3). Whether the proposed action of the Small Business Administration denying Kent entry into the 8(a) Program is arbitrary, capricious, or contrary to law. 15 U.S.C. Section 637(a)(9)(C), 13 C.F.R. Section 124.210(h)(1). Facts On July 28, 1993, Kent Appraisal Group applied for admission to the 8(a) Program. The basis for the application is that Kent's controlling partner, Carrie M. Rodriguez, is a socially and economically disadvantaged individual--a Hispanic American. The SBA denied the application on April 25, 1994. Subsequently, Kent requested reconsideration of its denial and submitted additional evidence which is a part of the record. The SBA denied Kent's request for reconsideration on August 12, 1994. The ground for denial, on reconsideration, was that Kent did not produce sufficient evidence which would allow the SBA to conclude that Mr. Tweeten, the nondisadvantaged partner and husband of Ms. Rodriguez, did not have the power to control Kent because he is the only partner who possesses the necessary licensing to appraise real estate. The rationale for the SBA's denial of the reconsideration request was: Current 8(a) program eligibility criteria [require an application be denied] if [nondisadvantaged individuals] control or have the power to control the applicant concern. Nondisadvantaged individuals or entities may be found to control or have the power to control when the nondisadvantaged individual or entity provides critical . . . licenses to the applicant concern. . . . [T]he nondisadvantaged partner of the applicant concern, holds the critical license (Real Estate Appraiser) necessary for the firm to conduct business. Without this license, the partnership could not operate in the appraisal industry. Ninety-six percent of your firms's revenue . . . is generated from Commercial Real Estate Appraisal and Consulting (emphasis added). [M]r. Tweeten is the [only partner] that has a background in operating in the [real estate] industry, while your primary background has been in accounting (emphasis added). Reconsideration Denial Letter at 2. Kent is a partnership consisting of two partners, Ms. Rodriguez, who has a 51 percent interest in the firm, and her husband Mr. Tweeten, who has a 49 percent interest. Kent is a financial consulting firm which specializes in hospitality and real estate consulting. The services it provides are in the areas of appraisals, audits, accounting, real estate investment, leasehold analysis, and real estate environmental assistance. Ms. Rodriguez is an Illinois-licensed Certified Public Accountant. She has specialized experience in the hotel and athletic club businesses. She assists Mr. Tweeten prepare appraisals using her knowledge of accounting, financial analysis, and computer programs which are necessary to appraise multi- tenant office buildings and retail centers. Mr. Tweeten is a certified real estate appraiser licensed in Illinois, Massachusetts, New York, and Pennsylvania. He has experience in real estate consulting and hotel operations. He provides appraisal, valuation, and marketing services to the firm. His license fees, tests, and state certifications cost the partnership $4,180 in 1993 and $1,885.50 in 1994. Kent's application and reconsideration request contain three completed appraisals it prepared in 1993. The properties were located in three states. Mr. Tweeten had a license in each of those states. The value of the properties in those appraisal were $850,000, $920,000, and $2,000,000. Each required a certified appraiser. The application also contains a listing of appraisals Kent completed in 1992 and 1993. On the list are six hotels, three office buildings, two multi-family apartment complexes, one industrial building, four retail complexes, and four special use properties. Some of the completed appraisals were in states where Mr. Tweeten did not hold a license. It is unclear whether these were appraisals that required licensed or certified appraisers. Position of the Parties Kent contends the SBA is incorrect in concluding the real estate appraiser's license is critical to the operation of Kent and that the record shows it operates in the appraisal industry without Mr. Tweeten's license. To support that contention it refers to the following: (1) it operates in states where none of the partners has a license and uses independent contractors to perform the work; (2) many states do not require appraisers to be licensed; (3) in Massachusetts nonfederal transactions do not require state certified appraisers; and (4) federal transactions require a license only if the value of the real estate is over $250,000. Kent urges that there is a business reason why Ms. Rodriguez does not hold an appraiser's license--it is more cost efficient to pay for licenses for one partner than for two. Kent also contends the SBA is incorrect in concluding that the record shows Ms. Rodriguez's primary background is in accounting. To support its contention, Kent points to evidence in the record it claims contradicts the conclusion of the SBA. See Facts, supra. Kent relies on Matter of Paragon Systems, Inc., SBA No. 440 (1993) to support its position and contends its case is identical to Paragon's. Kent urges I follow the Paragon decision in this case. In Paragon, it posits, the Administrative Law Judge correctly found that the SBA's action was arbitrary and capricious because the SBA denied Paragon admission into the 8(a) Program where a nondisadvantaged person held the firm's only engineering license. In response, the SBA argues a real estate appraiser's license is critical to Kent's ability to do business because Kent generates 96 percent of its income from real estate appraisals. It also asserts that Ms. Rodriguez is licensed as a Certified Public Accountant and accounting services only yielded 4 percent of Kent's income. Therefore, it reasons, this bolsters the argument that the license is critical to the operation of the firm. The SBA concedes that Massachusetts only requires a license to appraise real estate in federally related transactions for property valued over $250,000. Yet it contends it is difficult to conceive that federal entities would even consider doing business with a firm that could not do any appraisal. The SBA also argues that Paragon, supra, was wrongly decided and that the decision in Matter of Daigle Contracting Enterprises, Inc., SBA No. 376 (1991), should be followed. It asserts the facts in Daigle were similar to those in Paragon and this case. In Daigle, it urges, the Administrative Law Judge correctly sustained the SBA's denial of the firm's entry into the 8(a) Program because nondisadvantaged individuals held critical licenses and thus had the power to control the firm. Discussion The facts are not in dispute. Ms. Rodriguez, the disadvantaged partner, does not have an appraiser's license and does not claim she is able to complete an appraisal by herself. Mr. Tweeten, the nondisadvantaged partner, does.[2] If the license is critical and gives its holder the control or the power to control the firm, directly or indirectly, the SBA properly declined Kent's 8(a) application. The issue of control or the power to control is addressed at 13 C.F.R. Section 124.104 which provides that "for those industries requiring professional licensing . . . SBA must determine that the applicant concern or individuals employed by the applicant concern hold(s) the requisite license(s) (emphasis added)." Section 124.104(a)(1). Section 124.104 also provides that nondis-advantaged individuals may be found to control or have the power to control a concern if "the nondisadvantaged individual or entity provides critical . . . licenses to the 8(a) concern which directly or indirectly allows the nondisadvantaged individual to gain control or direction of the 8(a) concern." Section 124.104(d)(3). Thus, merely because Ms. Rodriguez is not a licensed appraiser does not, per se, disqualify Kent from the 8(a) Program as long as Kent has a licensed appraiser on its staff as a partner or an employee. 13 C.F.R. Section 124.104(a)(1). This inquiry must determine not only if the license is a requirement for Kent but also if the person who holds the critical license controls or has the power to control Kent. There is no definition of the word "critical" in the regulations. It is beyond question that an appraisal firm needs the services of an appraiser to perform its function. In that sense it is critical. What is questionable is whether a licensed appraiser is critical for Kent to do appraisals. Federally related transactions[3] do not require a state licensed or certified appraiser if the transaction value is $250,000 or less.[4] A state certified appraiser is required for all federally related transactions of $1,000,000 or more, nonresidential transactions of $250,000 or more, and complex residential transactions of $250,000 or more. In all other nonexempt cases either a state licensed or certified appraiser is required.[5] Hence, while an appraiser is necessary, the appraiser need not always be licensed or certified for federally related transactions. This, however, begs the question of whether a license or certified appraiser is necessary to be competitive and whether Kent's customers may require certified or licensed appraisers regardless of a legal requirement for licensing, thus making a license critical. Based on the past work history Kent provided in its 8(a) application and in the request for reconsideration, I believe the SBA was correct in concluding a real estate appraiser's license is critical to the success of Kent's operations whether or not it is legally required in all cases. This is especially true because the 8(a) Program subcontracts federal contracts to program participants. See 15 U.S.C. Section 637(a)(1)(B); 13 C.F.R. Section 124.307(a). There is no prohibition under Section 124.104(a)(1) for a nondisadvantaged partner to hold a firm's only license even if it is critical. The mere fact that a license is critical to a firm's operations does not preclude admission to the 8(a) Program. Admission can only be denied if possession of the critical license allows the holder to control or have the power to control the firm. See 13 C.F.R. Section 124.104(d)(3). Daigle and Paragon, supra, cited by the parties address the control issue. In Daigle, Daigle Contracting Enterprises, Inc. was a licensed Louisiana construction corporation. The Daigle decision concludes Daigle's corporate existence depends upon having a stockholder with a state contractor's license. The Administrative Law Judge, considering the argument that the disadvantaged controlling stockholder could have obtained a state license within 60 days of having passed an examination, found that a nondisadvantaged stockholder who held a contractor's license had the power to control the corporation. Daigle, supra. In Paragon, Paragon Systems, Inc., an Alabama corporation, provided engineering services. Its disadvantaged controlling stockholder did not have an engineering license and its nondisadvantaged stockholder did. The Paragon decision concluded that under Alabama law, engineering services can only be performed by a licensed engineer. The Administrative Law Judge found that the nondisadvantaged stockholder did not control or have the power to control Paragon because the disadvantaged stockholder could discharge the nondisadvantaged licensed stockholder and hire someone else with a license and continue to do business without affecting the corporation's status. Although it could not do engineering work without a licensed engineer, Paragon's corporate existence would not be terminated by the departure of its licensed engineer. Paragon, supra. The significant difference between these two factually similar cases that reach different conclusions on the issue of "power to control" is that in Daigle the corporate existence depended on one of the stockholders having a license to perform construction work; and in Paragon the corporate existence did not depend on having a stockholder who held an engineer's license but rather only needed a licensed engineer to do work for the corporation. The facts in this case are closer to those in Paragon than those in Daigle. In both Illinois[6] and Massachusetts,[7] where Kent has offices, an appraiser's license or certificate cannot be issued in the name of a corporation, firm, partnership, or group. Accordingly, Kent's existence as a partnership is not dependent upon having a licensed or certified appraiser as a partner. Kent can operate in states where Mr. Tweeten does not have a license, can appraise property where a license is not required, and can hire a licensed appraiser to appraise property where necessary or convenient. Thus, Mr. Tweeten's license as a certified appraiser does not give him control or the power to control the firm. Conclusion If any employee can hold a license to do business for a firm under Section 124.104(a)(1) without having control or the power to control a firm, then even if Mr. Tweeten held a critical license, he does not necessarily control or have the power to control the firm. The SBA concluded he did, but did not articulate a rational connection between the facts it found and that conclusion. For the SBA to conclude that just because Mr. Tweeten holds a critical license he controls or has the power to control Kent is unreasonable. This amounts to a clear error of judgment which is arbitrary and capricious. See Motor Vehicle Manufacturers Association of the United States v. State Farm Mutual Automobile Insurance Company, 463 U.S. 29, 43. Respondent's August 12, 1994 determination denying 8(a) Program entry to Petitioner, Kent Appraisal Group, IS ARBITRARY, CAPRICIOUS, AND CONTRARY TO LAW. See 15 U.S.C. Section 637(a)(9)(C), 13 C.F.R. Section 124.210(h)(1). This is the final decision of the Small Business Administration and is binding upon all parties, including those within the employ of the Agency. 15 U.S.C. Section 637(a)(9)(D), 13 C.F.R. Sections 124.210(i), 134.32(a)(4).[8] _________________________ Richard S. Arkow Administrative Law Judge [1] Small Business Act of 1958, Section 8(a), 15 U.S.C. Section 637(a) and 13 C.F.R. Parts 124 and 134. "The 8(a) Program is intended to be used exclusively for business development purposes to help small businesses owned and controlled by socially and economically disadvantaged individuals. . . ." 13 C.F.R. Section 124.1(a). [2] Federal law requires many appraisals involving federally related transactions be performed by individuals whose competency has been demonstrated and whose professional conduct is subject to effective supervision. The law encourages states to establish licensing agencies and establishes two categories of licenses: a state certified appraiser and a state licensed appraiser. A state certified appraiser can appraise any property. A state licensed appraiser can perform an appraisal in any federally related transaction where a certified appraiser is not required. It is more difficult to become a certified appraiser than a licensed appraiser. See generally, Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, 103 Stat. 183 (1989); 12 U.S.C. Section 3331 et seq. The SBA and Kent do not address the distinction between a certified and licensed appraiser. [3] Federally related transactions include any real estate financial transaction that the Federal Deposit Insurance Corporation or any regulated institution engages in, contracts for, and requires the service of an appraiser. 12 C.F.R. Section 323.2(f). [4] There are eleven other exceptions to the license requirement which are not relevant to this decision. See 12 C.F.R. Section 323.3. [5] 12 C.F.R. Section 323.3(d)-(e). [6] Ill. Ann. Stat. Ch. 225, para. 455/36.16 (Smith-Hurd 1993). [7] Mass. Gen. L. ch. 112, Section 187 (West 1993). [8] Judge Benjamin Usher was assigned this case on September 27, 1994. He retired from the Federal service January 3, 1995. I was assigned the case June 19, 1995. The case was not decided within 90 days of the filing of the Petition because of the absence of an Administrative Law Judge and a heavy caseload at the SBA. See 15 U.S.C. Section 637(a)(9)(F), 13 C.F.R. Section 124.210(j).