SBA SOP 50 10 8.1, App15.C.3 — Collateral

iii. When assessing the adequacy of collateral, the Lender must consider the impact that covenants and other restrictions recorded against the collateral may have on its value and marketability. The Lender must document this analysis in the file. Examples of items to review include: a) Deed restrictions, covenants, easement provisions, reversionary interests, subordinations, leases and options, and other provisions that restrict the use of the property for the benefit of a third party (Note: certain deed restrictions pertaining to the use of the property, which are intended to protect the health and safety of occupants, may be acceptable, e.g., deed restrictions based upon environmental concerns including restrictions on residential use, use as a day care center for children or seniors, use as a school, or use as a hospital); and b) Engineering Controls that require the Applicant or subsequent owners to install costly devices or structures such as extraction wells or subsurface barrier walls prior to constructing a building, remodeling, or otherwise improving the property. c) Environmental Indemnification Provisions that run with the land are not eligible and must be removed or waived as to the Federal Government. d. Collateral Requirements for 7(a) Change of Ownership Loans.

i. SBA considers a loan as “fully secured” if the Lender has taken security interests in all available fixed assets of the Applicant with a combined Net Book Value as adjusted below, up to the loan amount. For 7(a) loans, the term “fixed assets” means real estate, including land and structures, machinery and equipment owned by the business or an EPC. SBA does not require the Lender to place a lien on vehicles that already have a lien or unless the value of the vehicle (as reported by any of the following: an independent third party (e.g., orderly liquidation value from an appraisal, independent vehicle valuation company or website), or the purchase price allocable to such a vehicle if the 7(a) loan is being used to purchase the vehicle) is greater than $20,000 at the time the SBA loan number is assigned by SBA. For the purpose of determining whether the Lender must place a lien on a vehicle, Lender must document whether the vehicle already had a lien on it, or the source and dollar amount of the vehicle valuation in the credit memorandum. a) Used or existing machinery and equipment (excluding furniture & fixtures) may be valued at no more than 50% of Net Book Value or 80% with an Orderly Liquidation Appraisal minus any prior liens for the calculation of “fully secured”; b) Improved real estate can be valued at no more than 85% and unimproved real estate can be valued at 50% of the market value for the calculation of “fully secured” and the value must be determined in accordance with the requirements set forth in Appendix 19 Para. A.1.g. Commercial real estate appraisal requirements. c) Furniture and Fixtures may be valued at no more than 10% of Net Book Value or appraised value. d) Lenders must take a security interest in the accounts receivable and inventory of the operating entity. When the Lender takes a security interest in the accounts receivable and inventory, no more than 10% of the current book value of the assets may be used for the fully secured calculation. e) Working capital lines of credit may be issued alongside change of ownership loans under the following conditions: i) As part of the change of ownership transaction, the Borrower has the option to obtain a line of credit (conventional or government guaranteed) to support the working capital needs of the business. If the line of credit is required to be in first lien position on the accounts receivable and inventory acquired through the change of ownership transaction (e.g., the trading assets), the Lender must meet the following conditions to release those assets as collateral for the 7(a) change of ownership term loan, and must retain all documentation as evidence of compliance in the loan file (the following is not applicable to lines of credit in second lien position (e.g., SBA Express)): (a) Apply no less than 20% and not more than 50% of the day-one line of credit availability to the initial balance on the line of credit. The portion allocated to the line of credit balance must be used to fund the respective portion of the change of ownership transaction. (i) Day-one line of credit availability is defined as the amount of funds available to the Borrower on the first day that the loan proceeds are available. (a) For an open revolving line of credit, use the committed limit of the loan. (b) For an Asset-based line of credit, use the amount available on the initial borrowing base certificate. This option allows the Lender the flexibility to fund a portion of the overall purchase price directly onto the line of credit while ensuring that the Borrower has sufficient availability on their line of credit after closing. This flexibility has been structured to ensure that the 7(a) term loan facilitating the change of ownership was reduced by an amount greater than the collateral would otherwise provide for the fully secured determination. If the day-one line of credit availability would be less than 20% based on the size of the line or collateral advance rates, the Lender is prohibited from using this option.

ii. Collateral shortfall: If there is a collateral shortfall (not “fully secured”) on the SBA-guaranteed loan the Lender: a) Must take available equity in the personal real estate (residential and investment property including other commercial real estate regardless of whether the owner is actively running a business at the investment property) that is solely owned by any Co-Borrowers, direct and/or indirect owners of 20% or more of the Applicant and guarantors except Supplemental Guarantors. For purposes of this requirement, “solely owned” real estate includes property held in an entity that is solely owned, directly or indirectly, by such persons. Liens on personal real estate may be limited to the amount of the collateral shortfall. In addition, liens on personal real estate may be limited to 150% of the equity in the collateral. i) If utilizing 7(a) Small or SBA Express to support a change of ownership, the fully secured provisions apply, except the Lender is not required to take available equity in other commercial real estate solely owned by any Co-Borrowers, direct and/or indirect owners of 20% or more of the Applicant, guarantors and Supplemental Guarantors. This exception applies only to other commercial real estate that is not the Applicant’s project property. b) SBA does not require a Lender to collateralize a loan with real estate (including commercial, residential and investment properties owned by the Applicant or personally by the owners) to meet the “fully secured” definition when the equity in the real estate is less than 25% of the property’s fair market value. For this purpose, “lack of equity” means that the property’s fair market value, after giving effect to existing liens, does not provide at least 25% equity; the mere presence of a prior lien that restricts or prohibits the placement of a junior lien does not, by itself, constitute “lack of equity” under SBA rules. The Lender must document in their loan file the source (other than the personal financial statement) used to make the equity determination.

iii. Assets owned by an owner of the Applicant and Spouse: a) When an individual alone or together with his or her spouse or minor children owns 20% or more of the Applicant, the Lender must consider taking as collateral a lien on personal real estate (including commercial and investment properties not occupied by the Applicant) that is owned individually by the Applicant owner or jointly owned by the individual and his or her spouse or minor children. b) Real estate transferred by the owner of the Applicant to the non-owning spouse or minor children within 6 months of the date of the application will not be exempt from consideration as available collateral.