In recent months, the SBA lending community has seen SBA’s lease requirements go through a series of changes, but we may end up close to where we started. Historically, as a general rule of thumb, SBA lenders have required a borrower that is leasing space to obtain a lease with a term equal to or exceeding the term of the loan. However, certain factors (e.g. the type of collateral, type of business, location of business, etc.) sometimes justify permitting a borrower to proceed with a lease that has a term less than the term of the loan.
SOP 50 10 6 (and many SOPs prior to it) contained guidance as to when the lease term was required to match or exceed the term of the loan and when a lender might consider accepting a lease with a shorter term. In the past, a lender was expected to take into consideration whether a substantial portion of the loan proceeds were used for leasehold improvements, whether a substantial portion of the collateral was leasehold improvements, fixtures, machinery or equipment attached to the leased real property and whether the lender could obtain an assignment of the lease.
SOP 50 10 7, which replaced SOP 50 10 6 on August 1, 2023, then eliminated most leasing requirements and guidance and left SBA lenders guessing if they still needed to comply with the age old lease requirements that lenders had come to know.
SOP 50 10 7.1, which is currently in effect as of November 15, 2023, has added many of the “old” lease requirements and guidance back into the current SOP, but because of new phrasing, SOP 50 10 7.1 now requires that if a borrower is leasing space, “The lease term, including renewal options exercisable only by the Borrower, must equal or exceed the term of the loan.” SOP 50 10 7.1 does not provide any leeway for lenders to accept a lease with a term less than the loan term. SBA is aware that this requirement has been causing unintended consequences and difficulties for lenders and borrowers, and SBA has notified the SBA lending community that it is working on a procedural notice to modify the requirement. Until the procedural notice is issued, however, SBA has provided a fix for the interim period if lenders intend to approve a loan and permit a lease term less than the term of the loan.
7(a) lenders are instructed to send an email to Ginger Allen, Chief, 7(a) Loan Policy Division at firstname.lastname@example.org requesting an exception to policy for 7(a) loans. CDCs are instructed to send an email to Linda Reilly, Chief, 504 Loan Policy Division at email@example.com requesting an exception to policy for 504 loans. Such email should include a list of loans with sufficient loan identifying information, such as project address. SBA will respond to these emails with a written waiver of the SOP requirement that the lease term must equal or exceed the term of the loan. SBA’s email will also specify that the lender and borrower must comply with the following requirements:
Responsibilities When the Borrower is Operating in Leased Space
When a substantial portion of the loan proceeds will be used for leasehold improvements or a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery, or equipment that is attached to leased real estate:
- The SBA Lender must obtain a copy of the written lease between the Borrower and the landlord. The lease term, including renewal options exercisable only by the Borrower, should equal or exceed the term of the loan.
- An assignment of lease and Landlord’s waiver should be obtained. If the SBA Lender is unable to obtain the assignment of lease or landlord’s waiver:
- The lease term, including renewal options exercisable only by the lessee, must equal or exceed the term of the loan; and
- The SBA Lender must document its file with the attempt to obtain the assignment and the landlord’s waiver and the reason(s) for not providing it.
SBA lenders are instructed to document their loan file with a copy of SBA’s waiver email. Alternatively, SBA lenders may submit loans for non-delegated processing to the Loan Guaranty Processing Center for 7(a) loans and to the Sacramento Loan Processing Center for 504 loans to request an exception to policy for the lease term requirement. See SBA’s message at SBA_Information_re_Waiver_Re.pdf (ymaws.com) for more details. And stay tuned for SBA’s pending procedural notice for revisions to SBA’s lease requirements. For questions regarding SBA lease requirements, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at firstname.lastname@example.org.