With the U.S. Small Business Administration’s (“SBA”) release of SOP 50 10 7.1, Lenders should be pleased to see the return of some familiar provisions that were in effect in previous versions of the SOP.
Under the SOP 50 10 7 effective on August 1, 2023, SBA Lenders’ options and guidance related to loan maturities for 7(a) loans were limited compared to prior versions of the SOP.
Per the SOP 50 10 7 language, a mixed-purpose loan that funded both the purchase of real estate and other purposes (such as business acquisition, equipment purchase or working capital) would result in a blended term between the maximum allowable amount for a non-real estate use of proceeds (generally 10 years) and real estate loan (25 years). Alternatively, SBA suggested that lenders could split the loan into two separate loans with different maturities or bifurcate the amortization within the loan based on the use of proceeds. These options weren’t consistent with prior SBA guidance and not as advantageous to small businesses.
Fortunately, the updated SOP50 10 7.1 restores the maturity options that SBA Lenders and Borrowers are accustomed to. Beginning on November 15, the effective date of the SOP 50 10 7.1, the maximum loan maturities for 7(a) loans are as follows:
- Working capital, inventory and the financing of intangible assets must not exceed 10 years
- Equipment and fixtures loans should not exceed 10 years unless the IRS asset class useful life supports a longer term (maximum of 15 years)
- Real estate acquisition or improvement loans must not exceed 25 years. If loan proceeds are also used to construct or renovate the real property, then an additional period may be added to the maturity to complete the construction.
- Loans for improvements may not exceed 10 years plus an additional period to complete the leasehold improvements (maximum construction period of 12 months)
- Mixed purpose loans: When loan proceeds are used for multiple purposes, Lenders may blend the maturity or, if 51% or more of the proceeds are used for real estate then the maximum maturity may be up to 25 years.
- A complete change of ownership has a maximum term of ten years, but if the purchase includes the commercial real estate from where the applicant business operates and the value of the real estate is 51% or more of the purchase price, then the maximum loan term is 25 years.
- A complete partner buyout or partial change of ownership the maximum loan term is limited to 10 years.
The return of the 51% rule for mixed purpose and change of ownership loans will provide the extended term option to numerous Borrowers since real estate is often the primary piece of a 7(a) loan business acquisition transaction. The option to extend mixed purpose loans to the maximum term of 25 years can provide more favorable terms for Borrowers that may not be able to service the higher loan payments for a blended term loan.
Additionally, Lenders should note that the new SOP does not allow the 51% rule to be used when the loan finances a complete partner buyout or a partial change of ownership, regardless of whether the business owns real estate. This appears to primarily impact an EPC partner buyout, where the real estate is the primary asset, but the 25 year term will not be available for these transactions. SBA expressly limits the term for partner buyouts to 10 years. As partial changes of ownership are a new transaction structure permitted by SBA just this year, Lenders should keep in mind the 10 year term limit even for these transactions as they incorporate these transactions into their SBA loan portfolios.
For questions regarding the new SOP 50 10.7.1 or other recent updates to the SBA 7(a) loan program, please contact the attorneys at Starfield & Smith at 215-542-7070 or email us at firstname.lastname@example.org.