SBA Lending Matters Newsletter
A Word from Arne

There is little doubt that the SBA lending environment has been unsettled in recent months. Stimulus provisions have come and gone – and come back again. Currently, we are enjoying a waiver of 7(a) guaranty fees and increased guaranty percentage limits. By every indication, these provisions will expire on or before 12-31-10 and will not be extended.

In several recent conversations with lenders, we have seen a recurring theme surface: with or without the stimulus provisions, SBA lending remains a very valuable tool for lenders and borrowers. While we have all enjoyed the special provisions, we can’t afford to forget this fact – and as we revert back to a “normal” agency operation, now is a good time to review some excellent applications of SBA loan programs:

Business Acquisitions – When faced with a request to finance the purchase of a business, lenders may struggle with valuation and/or collateral issues. By offering a conforming business valuation to support the purchase price, the SBA 7(a) program provides lenders with an excellent enhancement. Such valuations are heavily weighted towards historic and projected cash flow levels, and they separate the assets being purchased from other items. SBA also allows for the purchase of an individual ownership interest to be financed by another owner of the borrowing entity. This option can be used as an exit strategy for a departing owner.

Debt Refinancing – A great deal of misunderstanding exists about refinancing debt with SBA loan programs. Historically, SBA has restricted or prohibited debt refinancing in order to limit loan volume. Current SBA procedures for 7(a) loans allow lenders to refinance existing debt held by another lender, as well as debt held by their own banks. Borrowers must meet the “unreasonableness” eligibility test, which includes considerations such as balloon payments or improvement in cash flow. In addition, recent changes to the SBA 504 program will now allow qualifying debt held by a small business to be refinanced.  We are awaiting SBA guidance on this issue and will relay it to you as quickly as possible.

Collateral Values – SBA has recently advised us of the following collateral liquidation percentages, which we consistently apply as we prepare a loan application.

Real Property: Commercial R E 75%
  Residential R E 80%

Unimproved Land


Business Assets (net of depreciation): Mach. & Equip. 50%
  Furn. & Fixtures 10%
  A/R and Inventory 20%
  Leasehold Imp. 5%

We will continue to keep our subscribers advised of current policy and regulatory SBA issues as the information becomes available. Please feel free to contact us with any specific questions you may have.

In closing, all of us here at Holtmeyer & Monson want to thank you for your support.  We sincerely appreciate the opportunity to serve you and your institutions.  We all wish you and your families a happy, healthy, and safe holiday season.

Featured Article

Best Practices: Real Estate Appraisals
By Jessica L. Conn, Esq., Starfield & Smith, P.C.

When does the SBA require an appraisal of commercial real estate?
In a 7(a) loan greater than $250,000.00, an appraisal is required for ALL commercial real estate. If the 7(a) loan is less than $250,000.00 the lender should follow its regulators' guidelines.

For a 504 loan, an appraisal is needed if the estimated value of the property is greater than $250,000.00, or if the estimated value of property is less than $250,000.00 and the appraisal is needed to establish creditworthiness.
The SBA does not specifically require a real estate appraisal on non-commercial real estate or real estate pledged to secure a personal guaranty.

What kind of appraisal is required?
For both 7(a) and 504 loans when there is no construction or renovation, the lender should obtain an "as-is" appraisal.

For both 7(a) and 504 loans when there is construction or renovation, the general rule is that the lender should obtain an "as-built" appraisal. Such an appraisal is obtained prior to construction being completed and is based, in large part, on the plans and specifications provided to the appraiser. Lenders should be aware that when a project involves construction, the SBA may have additional requirements beyond the "as-built" appraisal.

When a 7(a) construction loan closes prior to construction being completed, the lender must monitor the construction to ensure that there are no deviations from the plans used by the appraiser as the basis for the "as-built" appraisal. Under SOP 50 10 5(C), if there are deviations from the plans after a loan has closed, the lender MUST notify the SBA. The SBA will determine the appropriate action, which may include obtaining additional collateral.

For 504 construction loans and 7(a) construction loans that close after construction is completed, the lender or CDC should start by assessing the extent of the work being performed. If the loan is being used to finance new construction or "substantial renovation," which is defined as renovation that is more than 1/3 of the purchase price or fair market value at the time of application, the lender or CDC must verify the appraised value. In order to do this, the lender or CDC must obtain a statement from the appraiser that "the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based." Without such a statement, the lender or CDC cannot close the loan without the SBA's prior written permission.

Who can perform the appraisal?
For both 7(a) and 504 loans, the appraisal must be requested by and prepared for the lender/CDC. The appraiser MUST be independent and must not have any financial or other type of interest in the property or transaction. For properties with a value less than $1,000,000.00 the appraiser should be either State-licensed or State-certified. For properties valued over $1,000,000.00, the appraiser MUST be State-certified.  If the property is a special-use property, the appraiser must have experience with that particular industry and type of property.

Lenders must be sure to follow the guidelines set forth by the SBA in obtaining real estate appraisals in order to protect the SBA guaranty and properly document the loan. For more information on this and other SBA related topics, contact Jessica Conn at 215-542-7070 or [email protected].

Regulatory Corner

SBA Announces Expanded Dealer Floor Plan Pilot Program
SBA instituted a Dealer Floor Plan Pilot Program (DFP) as a part of the Small Business Jobs Act. Due to limited usage, this program expired on September 30th. SBA is now developing a new, expanded DFP Initiative that is expected to positively affect automobile, recreational vehicles, and marine dealers. The revised program is due to be announced during April or May of 2011. We will keep you informed of these developments.

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SBA Hot Topic

While the SBA has designated a large number of servicing request items as unilateral actions to be made by the lender, any such decisions still need to comply with SBA guidelines. For example, you may decide to release, submit, or exchange collateral for a closed loan; however, the SBA may still require justification of your decision in the event of a liquidation claim.


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