SBA rules · SOP 50 10 8.1
What lease does a business need for an SBA loan?
SBA requires written leases with terms that equal or exceed the loan term whenever leasehold improvement or collateral thresholds are met, as well as in all Eligible Passive Company (EPC) and Operating Company (OC) arrangements.
In detail
- Third-party lease term and landlord waiver: When a borrower operates in leased space and $500,000 or 30% of loan proceeds (whichever is less) will be used for leasehold improvements, or when $500,000 or 30% of collateral consists of leasehold improvements, fixtures, machinery, or equipment attached to leased real estate, the lender must obtain a written lease whose term (including renewal options exercisable solely by the borrower) equals or exceeds the loan term, and an assignment of lease and landlord waiver should be obtained.
- Failure to obtain third-party waiver: If the lender cannot obtain an assignment of lease or landlord waiver, the lease term (including borrower-only renewal options) must still equal or exceed the term of the loan, and the lender must document its attempt to obtain them and the reasons for not obtaining them in the file.
- EPC/OC lease term and subordination: The EPC must lease the property directly to the OC under a fully executed written lease with a term (including renewal options exercisable solely by the OC) at least equal to the term of the loan, and the lease must be subordinated to SBA's lien on the property.
- EPC/OC rent limit and assignment of rents: The EPC must furnish an assignment of all rents paid under the lease as collateral, and rent payments cannot exceed the amount required to make the loan payment plus direct property holding expenses such as routine maintenance, utilities, insurance, and taxes.
How sbaloansHQ handles this
How does sbaloansHQ handle the lease on an acquisition?
The lease is one of the first documents we ask for on a business in leased space. If the remaining term plus your own renewal options is shorter than the loan, the time to fix it is before you sign the purchase agreement, while the landlord still has a reason to say yes to an extension or a new lease.
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The source
What the SOP says
“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.
“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 in its file its attempt to obtain the assignment and the landlord’s waiver and the reason(s) for not obtaining them.
“The lease must be subordinated to the SBA’s mortgage, trust deed lien, or security interest on the property (Note: This is not the same as a Landlord’s Waiver);
“The lease must have a term, including options to renew exercisable solely by the OC(s), at least equal to the term of the loan;
“The rent or lease payments cannot exceed the amount necessary to make the loan payment to the Lender and an additional amount to cover the EPC’s direct expenses of holding the property, such as routine maintenance, utility expenses, insurance, and property taxes.
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Related reading
This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.