December is not only one of the most magical times of the year, but also typically one of the busiest times for commercial lenders. With the demands of the season, it would be easy to miss critical updates to the U.S. Small Business Administration (“SBA”) lending programs. One such update was the issuance of SBA Procedural Notice 500-862692 (“Notice”) effective December 6, 2024. While the Notice provides for administrative updates to SBA’s 7(a) and 504 loan programs, it also provides for some substantive changes that take effect immediately and are worth studying before the end of the year.
First, the Notice provides for an extension of seven (7) procedural notices for an additional two years (listed in the Notice). It also provides for the rescission of SBA Procedural Notice 5000-851789, except for some formatting corrections to SOP 50 10 7.1. More interesting to SBA Lenders is the number of updates to the Standard Operating Procedures (“SOP”) 50 10 7.1, Lender and Development Company Loan Programs and SOP 50 55, 504 Loan Servicing and Liquidation. The following is a brief summary of the SOP changes, with a more thorough examination of certain changes to be discussed in future articles.
Updates Affecting both the 7(a) and 504 Loan Programs
The Notice provides for a number of updates that affect both the 7(a) and 504 Programs. The first update is to clarify that when financing leasehold improvements, tenant improvement allowances are not required to be used to paydown the Loan. Instead, Lenders should “do what they do” for their similarly-sized, non-SBA guaranteed loans, provided the funds are used for a business purpose.
Next, SBA removes the requirement for non-owner spouses to disclose their personal financial resources, except to the extent such resources are co-owned with the borrowing spouse. Additionally, Supplemental Guarantors are not required to submit their financial statements.
SBA also removed its requirements for IRS tax transcripts for Small 7(a) or Express loans, or where the 504 project is $500,000 or less. Instead, Lenders are permitted to “do what they do” for similarly-sized, non-SBA guaranteed loans or as provided in their loan policies that have been reviewed by SBA.
SBA confirmed that both 7(a) and 504 loans may be used in conjunction with commercial property assessed clean energy (C-PACE) financing. C-PACE financing will be discussed in more detail in a future article.
Updates Affecting Only the 7(a) Loan Program
For 7(a) loans, SBA is making a welcome change to the loan maturity for both complete and partial changes of ownership. Going forward, loan maturity may be a blended maturity based on the business’ assets or, if 51% or more of the loan’s proceeds are for real estate, to allow for a loan maturity of up to 25 years. Another update for change of ownership is that SBA replaced the term “individual(s)” with “Person(s)” meaning either a human or legal entity, to described who may acquire an interest in a company. SBA also added language to SOP 50 10 7.1 to allow partial changes of ownership that are made through multiple steps where the result is a new entity owned by some or all of the owners of the original business and one or more new owners.
Another welcome update is SBA’s guidance regarding vehicle liens. A lien on vehicles is not required unless the value of the vehicle (as reported by any of the following: an independent third party (e.g., orderly liquidation value from an appraisal, independent vehicle valuation company or website), or the purchase price allocable to such a vehicle if the 7(a) loan is being used to purchase the vehicle) is greater than $10,000 at the time the SBA loan number is assigned by SBA. Lender’s decision regarding whether or not to require vehicle liens must be addressed in the credit memorandum.
Next, SBA changed the requirement for a business valuation when financing a change of ownership with a Small 7(a) or Express loan to “do what you do” based on Lender’s policies and procedures used for its similarly-sized, non-SBA guaranteed commercial loans. As with all SBA commercial underwriting standards, the business valuation method must at a minimum be prepared in a commercially reasonable and prudent manner.
The Notice updates also provide for a new option for “do-it-yourself” construction. Instead of obtaining two unaffiliated contractor bids to determine the costs for the construction, a Lender may now rely on a single estimate provided by a third-party construction management firm, or by the Lender’s existing internal construction management department.
SBA also amended the SOP to allow Lenders to refinance merchant cash advances, factoring agreements, and non-amortizing credit facilities. See Best Practices: Refinancing MCA Debt.
Updates Affecting Only the 504 Loan Program
A few updates in the Notice only impact 504 loans. The first update provides that the CDC must send written notice no less than 10 business days prior to refinancing an existing 7(a) or 504 loan. Next, SBA clarifies that for non-arm’s length change of ownership projects, the purchase price is limited to the lesser of the As-Is appraised value or the purchase price of 504 eligible fixed assets. Finally, for change of ownership transactions when IRS verification of seller’s financial information is not available, CDCs may verify the seller financial data using other forms of verification from third-party sources, such as sales tax payment records, data aggregation services, credit reporting services, etc.
This article only provides a brief description of the changes in the Notice. Lenders are encouraged to take the time to read the Notice and consider how the updates may impact their year end transactions, as well as loans targeted to close in the new year. For more information on the Notice, please contact Kim Rayer at krayer@starfieldsmith.com.
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