Well, it’s here. At first glance SOP 50 10 5 (K) is loaded with changes. On review, many of them aren’t new, just incorporations of past Notices to 50 10 5 (J.)  That said, here are a few items that are new or that we feel worthy of a reminder, given their incorporation into the new SOP. There are more changes to discuss, but we’re throwing a few out now to prepare you before the new SOP is effective April 1, 2019. Here goes:

  • Uses of proceeds. Purchase of land is only eligible when the purchase is part of an eligible project. We often see this in when a borrower is looking to purchase a large amount of acreage, but only a small part would be used for the business. The rest would be leased out to farmers, ranchers, and similar parties. (Subpart A, II. E. Use of Loan Proceeds, pg. 89)
  • Refinance of debt for change of ownership. If debt to a financial institution or a third party is being refinanced within 12 months of a change of ownership, the loan must be processed under non-delegated authority. (Subpart B, Chapter 2, V. 3., g. pg. 132)
  • Leased Space. A Borrower/Operating Company is prohibited from leasing space to businesses engaged in illegal activity under federal, state or local law. The lender must notify SBA Counsel as soon as they become aware of the lease and advise them of the action(s) the lender intends to take. (Subpart B, V., F. 1., g., pg. 138).

Important Note: We see that SBA has not provided additional guidance on what the “expected actions” are to be. However, from our experience with clients in states that have legalized marijuana we have learned that SBA expects the tenants to be removed from the property. As we pointed out early last year with a previous issue, marijuana is a federal offense and the federal government looks to borrowers and lenders as owners of the property in question and could seize a borrower’s assets and the lender’s assets. Without additional guidance from SBA, we recommend that you watch this issue closely.

  • Environmental Special Use Facilities. SBA has added more guidance on Child-Occupied Facilities and Drycleaners. For Child Occupied Facilities drinking water must be tested at all taps and fountains used as drinking sources and in conformance with listed regulations. For Drycleaners SBA has stated that any deviation from the requirements must be approved by SBA as an exception to policy and that the investigations must address soil, groundwater and soil vapor. (Subpart B, Chapter 4, V. H. 1. & 2., pgs. 211-212)
  • Construction. SBA has updated the blanket waiver for the performance bond requirement (pg. 216-217). This waiver is granted when the lender retains a third-party construction management firm or when the lender has an internal construction management department that routinely manages construction for its commercial non-SBA loans in a commercially reasonable prudent monitoring (Subpart B, Chapter 5. B. 3. a. & b., pgs. 216-217)

Please Note: words such as “commercially reasonable,” “prudent monitoring” and “routinely.” SBA also has added that if any mechanic’s liens or other liens take priority over the lender’s lien on the collateral, the guaranty may be subject to denial or repair.

Stay tuned for Round 2!

Rebecca Mendoza
Senior Associate