I’ll bet you’ve been involved in more than one discussion about SBA’s lease term requirements when the borrower is operating in leased space. If so, you were one of many people pleased to see SBA Procedural Notice 5000-852522.1 I know I was. Here’s why:

I had been an SBA lender for many years and thought I understood the rules pretty well when I first ran into an issue of a lease term that was less than the loan term. One of my colleagues had a client applying for a 7(a) loan to furnish its new company headquarters. Cash flow and credit were fine. The discounted value of the equipment was less than the loan amount, but my colleague had assured the client that it wouldn’t be an issue:

“Happens all the time. In my experience SBA will not decline the loan just because the loan term is longer that the lease term. Here’s a tape measure for you to measure for drapes in your new offices.”

Naturally, the client was upset when the loan was declined.

So when on December 6, 2023 SBA Procedural Notice 5000-852522 fell out of St Nick’s bag of goodies, I’m sure my former colleague and his clients toasted the Jolly Ole’ Elf.

In brief, here are the lease term requirements according to the Notice:

  • If the loan proceeds are not financing a substantial amount of leasehold improvements, or if a substantial portion of the collateral is not attached to leased real estate, the loan term need not be greater than or equal to the lease term.
  • If on the other hand, loan proceeds are financing a substantial amount of leasehold improvements, then the lender must obtain a written copy of the lease agreement.
  • And if the lender cannot obtain an assignment of lease or a landlord’s waiver, then the lease term must be at least as long as the SBA loan.

I hope, like me, you saluted Procedural Notice 5000-852522 with an appropriate amount of holiday cheer!

Richard Jeffrey, Senior Associate
Head Underwriter

1 SBA Procedural Notice 5000-852522. updates four sections of SOP 50 10 7.1:1) Lease Term Requirements when the borrower is operating in leased space: This revision intends to provide additional flexibility so that in most cases, 7(a) lenders should no longer require an exception to policy for this issue. However, if you still need an exception to the lease term requirements in accordance with Procedural Notice 5000-852522, you will need to follow the standard procedures for requesting an exception to policy, which entails submitting the loan for non-delegated processing through SBA’s Loan Guaranty Processing Center and requesting the exception through the LGPC.

Other SOP sections addressed: 2) equity requirements for complete partner buyouts and partial changes of ownership; 3) 7(a) loan maturities for complete changes of ownership, and; 4) clarifies provisions related to the use of 7(a) loan proceeds to refinance same institution deb