SBA Procedural Notice: Updates to SOP 50 10 7.1
Summary
SBA Procedural Notice 5000-852522 revises provisions of SOP 50 10 7.1, effective December 6, 2023. For a borrower in leased space, the lender must obtain the lease; without an assignment of lease and landlord's waiver, the lease term, including borrower-only renewal options, must equal or exceed the loan term. For partner buyouts and partial changes of ownership, cash contributed must reflect a debt-to-worth ratio of no greater than 9:1 or be at least 10% of the purchase price, whichever is less. A Preferred Lender Program lender cannot refinance its own non-SBA debt with a 7(a) loan that cuts its exposure; the example is a $200,000 loan whose 75% guaranty leaves $50,000 at risk. A complete change of ownership may have a blended maturity when commercial real estate is under 51% of the price.
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SBA Procedural Notice
TO: All SBA Employees and SBA Lenders CONTROL NO.: 5000-852522
SUBJECT: Updates to SOP 50 10 7.1 EFFECTIVE: December 6, 2023
Purpose of this Notice:
The purpose of this Notice is to revise provisions in SOP 50 10 7.1 related to Borrowers
operating in leased space, equity requirements for complete partner buyouts and partial changes
of ownership, and 7(a) loan maturities for complete changes of ownership. This Notice also
clarifies provisions related to the use of 7(a) loan proceeds to refinance same institution debt.
The revised provisions are effective as of the date of this Notice.
Responsibilities When the Borrower is Operating in Leased Space
SOP 50 10 7.1, Section A, Chapter 3, Paragraphs C.2.a. and C.2.b. (page 37), which applies to
both the 7(a) and 504 Loan Programs, are revised as follows:
Subparagraphs C.2.a. and C.2.b. are deleted in their entirety and replaced with the following:
“a. When the Borrower is operating in leased space and 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:
i. The SBA Lender must obtain a copy of the written lease between the Borrower and the
landlord. For 7(a) loans, the lease term, including renewal options exercisable only by the
Borrower, should equal or exceed the term of the loan. For 504 loans, the lease term must equal
or exceed the term of the loan. An assignment of lease and Landlord’s waiver should be
obtained.
ii. If the SBA Lender is unable to obtain the assignment of lease or landlord’s waiver, for both
7(a) and 504 loans, the lease term, including renewal options exercisable only by the Borrower,
must equal or exceed the term of the loan. Additionally, 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.”
PAGE 1 of 4 EXPIRES: 12/1/24
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Subparagraphs C.2.c. and C.2.d. are renumbered as Subparagraphs C.2.b. and C.2.c, respectively.
Standard 7(a) Loans – Equity Requirements for Complete Partner Buyouts and Partial
Changes of Ownership
In SOP 50 10 7.1, SBA intended to provide Borrowers using 7(a) loans to fund complete partner
buyouts and partial changes of ownership with an additional method to meet minimum equity
requirements that would allow for smaller cash outlays from the Borrowers or owners. One of
the methods referenced measuring the business’ debt-to-worth ratio based on the business’ pro
forma balance sheet. SBA is revising this text to clarify that the required cash contribution must
increase the business’ debt-to-worth ratio based on the business’ balance sheet for the current
quarter prior to the change in ownership and to clarify which owners must make the required
cash contribution.
Consequently, SOP 50 10 7.1, Section B, Chapter 1, Paragraph C.2.b.i. (Changes of ownership –
page 112) is revised as follows:
Subparagraph b.i.b)iii) is replaced with the following:
“iii) In the event the Lender is unable to document that both i) and ii) above are satisfied, the
remaining owner(s) must contribute cash either sufficient to reflect a debt-to-worth ratio of no
greater than 9:1 on the business’ balance sheet for the current quarter prior to the change in
ownership or in the amount of at least 10% of the purchase price of the business, as reflected in
the purchase and sale agreement, whichever is less.”
Subparagraph b.i.c)ii) is replaced with the following:
“ii) In the event the Lender is unable to document that i) above is satisfied, the new and/or
existing owners must contribute cash either sufficient to reflect a debt-to-worth ratio of no
greater than 9:1 on the business’ balance sheet for the current quarter prior to the change in
ownership or in the amount of at least 10% of the purchase price of the business, as reflected in
the purchase and sale agreement, whichever is less.”
7(a) Loans to Refinance Same Institution Debt
SOP 50 10 7.1 set forth the prohibition in the regulation at 13 CFR § 120.452(a)(2) that a Lender
cannot make a 7(a) loan under Preferred Lender Program (PLP) delegated authority that reduces
the 7(a) Lender’s existing credit exposure for any Borrower. SBA also clarified that Lenders
with SBA Express authority may approve SBA Express loans that reduce the Lenders’ existing
credit exposure to a Borrower, as these loans are not made using PLP delegated authority.
In response to questions about this provision, SBA is clarifying what is meant by reducing the
7(a) Lender’s existing credit exposure to a Borrower. Reducing the 7(a) Lender’s existing credit
exposure to a Borrower occurs when 1) a 7(a) Lender refinances its own (also known as same
institution debt (SID)) non-SBA guaranteed debt with the proceeds of a new SBA-guaranteed
7(a) loan, or 2) when a 7(a) Lender refinances an existing SID 7(a) SBA Express guaranteed loan
with a new 7(a) loan that has a higher SBA guaranty percentage. This PLP underwriting
prohibition applies even if the project size is increasing due to additional funds being provided
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Must be accompanied by SBA Form 58
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for other uses of proceeds such as when the project includes additional debt refinancing, real
estate acquisition, or working capital, etc.
For example, if the 7(a) Lender has an existing SID non-SBA guaranteed loan for $200,000, the
7(a) Lender’s existing credit exposure to the Borrower is $200,000. The 7(a) Lender would not
be able to use PLP delegated authority to approve a new 7(a) Small loan for $200,000 because
with the 7(a) Small loan’s 75% guaranty, the 7(a) Lender’s credit exposure is reduced from
$200,000 to $50,000. However, the 7(a) Lender may approve this loan using non-delegated
procedures or as an SBA Express loan.
The existing SOP guidance regarding refinancing an existing 504 loan with a new 7(a) loan
remains unchanged.
Loan Maturity for 7(a) Loans for Complete Changes of Ownership
SOP 50 10 7.1 states that for 7(a) loans for complete changes of ownership, only when the
purchase price includes the commercial real estate from which the Applicant business operates
(i.e., is not investment or personal real estate) and when the value of the commercial real estate is
51% or more of the purchase price, the loan may have a maximum maturity of 25 years.
Otherwise, the maximum maturity is 10 years.
SBA is revising this requirement to permit a blended maturity on 7(a) loans for complete
changes of ownership when the purchase price includes assets such as equipment that would for
other types of loans have a term of up to 15 years based on the IRS asset class useful life and
when less than 51% of the change of ownership purchase price is attributable to the value of
commercial real estate.
SBA is revising the text in SOP 50 10 7.1, Section B, Chapter 1, Paragraph B.3.f.i. (Standard
7(a) loans, page 101), Section B, Chapter 2, Paragraph B.3.a.i.f)i) (7(a) Small and SBA Express
loans, page 132), Section B, Chapter 4, Paragraph A.3.c.i.b)vii) (Export Express loans, page
197), and Section B, Chapter 4, Paragraph C.3.c.vii (International Trade loans, page 246) to read
as follows:
“For a complete change of ownership: If the purchase price includes the commercial real estate
from which the Applicant business operates (i.e., is not investment or personal real estate) that is
valued at 51% or more of the purchase price, the loan may have a maximum maturity of 25
years. If the purchase price does not include commercial real estate valued at 51% or more of the
purchase price, the maturity for a loan for a complete change of ownership may be calculated
based on the blended (pro-rated) assets included in the purchase price, with equipment, fixtures,
or furniture having a term up to 15 years if the IRS asset class useful life supports the term, with
commercial real estate from which the Applicant business operates having a term up to 25 years,
and all other assets having a term up to 10 years. Otherwise, the maximum maturity is 10 years.
In either scenario, if the complete change of ownership involves a commercial real estate project
that is under construction, when calculating the maturity, the term attributed to real estate may be
up to 25 years plus an additional period reasonably necessary for the construction or renovation.”
PAGE 3 of 4 EXPIRES: 12/1/24
SBA Form 1353.3 (4-93) MS Word Edition; previous editions obsolete
Must be accompanied by SBA Form 58
Federal Recycling Program Printed on Recycled Paper
The existing SOP guidance regarding loan maturity for complete partner buyouts or partial
changes of ownership remains unchanged.
Questions:
Questions concerning this Notice may be directed to the Lender Relations Specialist in the local
SBA Field Office.
Kathryn Frost
Associate Administrator (Acting)
Office of Capital Access
PAGE 4 of 4 EXPIRES: 12/1/24
SBA Form 1353.3 (4-93) MS Word Edition; previous editions obsolete
Must be accompanied by SBA Form 58
Federal Recycling Program Printed on Recycled Paper
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