The SBA’s rules regarding maximum allowable loan maturities for various change of ownership transactions have evolved since the effective date of SOP 50 10 7.1.
Generally speaking, SBA allows borrowers to use SBA 7(a) loan proceeds to fund the following types of change of ownership transactions:
- Complete Change of Ownership
- Complete Partner Buyout
- Partial Change of Ownership
SOP 50 10 7.1 states that:
(i) For a complete change of ownership: Only when the purchase price includes the commercial real estate from which the Applicant business operates (i.e., is not investment or personal real estate) and when the value of the commercial real estate is 51% or more of the purchase price, the loan may have a maximum maturity of 25 years. Otherwise, the maximum maturity is 10 years.
(ii) For a complete partner buyout or for a partial change of ownership: This is, by its nature, a transaction based on the redemption or sale of stock for equity in the business; therefore, the loan maturity is limited to a maximum of 10 years.
SBA Procedural Notice 5000-852522, effective December 6, 2023 revised the maximum allowable loan maturity for a Complete Change of Ownership, as follows:
For a complete change of ownership: If the purchase price includes the commercial real estate from which the Applicant business operates (i.e., is not investment or personal real estate) that is valued at 51% or more of the purchase price, the loan may have a maximum maturity of 25 years. If the purchase price does not include commercial real estate valued at 51% or more of the purchase price, the maturity for a loan for a complete change of ownership may be calculated based on the blended (pro-rated) assets included in the purchase price, with equipment, fixtures, or furniture having a term up to 15 years if the IRS asset class useful life supports the term, with commercial real estate from which the Applicant business operates having a term up to 25 years, and all other assets having a term up to 10 years. Otherwise, the maximum maturity is 10 years. In either scenario, if the complete change of ownership involves a commercial real estate project that is under construction, when calculating the maturity, the term attributed to real estate may be up to 25 years plus an additional period reasonably necessary for the construction or renovation.
It was notable that SBA Procedural Notice 5000-852522 did not change the SOP guidance regarding maximum loan maturities for Complete Partner Buyouts or Partial Changes of Ownership, which caused confusion and concern for many SBA borrowers.
With the issuance of SBA Procedural Notice 5000-862692, effective December 6, 2024, the maximum allowable loan maturities are now consistent for ALL types of change of ownership transactions, based on the following provision (which revises SOP 50 10 7.1, Section B, Chapter 1, Para. B.3.e. (Standard 7(a) page 101); and Chapter 2, Para. B.3.a.i.e) (7(a) Small and SBA Express page 132):
Mixed purpose loans and loans for all types of changes of ownership: When 7(a) loan proceeds are used for changes of ownership and/or for multiple purposes (land and building, working capital, machinery & equipment), or the refinancing of any of these purposes, the maturity may be a blended maturity or, if 51% or more of the use of the 7(a) loan’s proceeds are for real estate, the maximum maturity may be up to 25 years. For stock purchases, the loan maturity may be based on the underlying assets/interest financed by the 7(a) loan as supported by a business valuation/appraisal.
To avoid confusion, and inconsistency, with the revised provision, SBA Procedural Notice 5000-862692 also effectively deletes the following provisions: SOP 50 10 7.1, Section B, Chapter 1, Para. B.3.f (Standard 7(a) page 101); and Chapter 2, Para. B.3.f) (7(a) Small and SBA Express page 132).
If your lending institution has questions about the recent change to the maximum allowable maturities for change of ownership transactions, or other SBA lending matters, please contact us at SBAQuestions@JellumLaw.com.