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March 20, 2019

Best Practices: Leasing Restrictions under the new SOP 50 10 5(K)

by Jennifer E. Borra

Effective April 1, 2019, SBA’s SOP 50 10 5(K) contains provisions restricting SBA borrowers from leasing real estate acquired with SBA loan proceeds to any business that a borrower knows is engaged in any activity that is illegal under federal, state or local law or any activity that can be reasonably determined to support or facilitate any activity that is illegal under federal, state or local law (such as a marijuana dispensary).  The SOP also requires SBA lenders to notify SBA Counsel as soon as the lender becomes aware of any such lease and advise of the action(s) the SBA lender intends to take.

SBA Policy Notice 5000-17057, issued last year, previously discussed eligibility of businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana.  Since federal law prohibits the sale and distribution of marijuana, businesses that derive revenue or support the end-use of marijuana are likely ineligible for SBA financing.  The new SOP incorporates the language from the policy notice with additional clarification of direct marijuana businesses and indirect marijuana businesses.  Additionally, the policy notice indicated that hemp-related businesses are ineligible for SBA financing unless the business can demonstrate legality under federal and state laws.  The new SOP now states that, consistent with the Agriculture Improvement Act of 2018 (Public Law No. 115-334), a business that grows, produces, processes, distributes or sells products made from hemp (as defined in Section 297A of the Agricultural Marketing Act of 1946) is eligible.

In order to comply with the SOP’s leasing restriction to businesses engaged in potentially illegal activities, there are several steps lenders can take.  First, lenders should ensure that they review third party leases for details concerning any proposed third party tenant’s use of the property.  Second, for existing tenants, lenders should perform a site visit or require any third party inspection company to visit the third party tenant space at the subject property and verify the type of business and business activity conducted.  Finally, the 2018 SBA 7(a) Authorization boilerplate contains a new certification regarding the leasing restriction to businesses engaged in illegal activities, which lenders must include in the Borrower’s Certification that the borrower signs at closing.  This list is not exhaustive, but includes some due diligence that would assist lenders in complying with the SOP’s requirements.

In the event a lender becomes aware of a third party lease to a business engaged in an illegal activity, lenders must notify SBA counsel as required by the SOP and determine a plan of action as SBA deems appropriate.  NAGGL is currently seeking additional information from SBA officials concerning what lender actions are necessary under these circumstances.

For assistance with SBA compliance matters, contact the attorneys at Starfield & Smith at 215.542.7070 or visit our website at www.starfieldsmith.com.