SBA SOP 50 10 8.1, App19.A — General Requirements

A. General Requirements 1. Collateral See Section A, Chapter 5, Paragraph A. for guaranty requirements. a. General collateral standard

i. In identifying collateral, Lenders must use commercially reasonable and prudent practices that are at least as thorough as those used for similarly sized, non-SBA guaranteed commercial loans. Decisions regarding what collateral must be taken to secure a loan must be based on the circumstances of the individual loan, including loan size, and must meet the minimum requirements set forth in this Appendix. b. Refinance transactions i. When loan proceeds will be used to refinance existing debt, except for trading assets, the loan must be secured with at least the same collateral and lien priority as the debt being refinanced, unless a program specific provision states otherwise. If the debt being refinanced is over collateralized under SBA collateral requirements and the SBA guaranteed loan will remain fully secured, the Lender may release excess collateral. Substitute collateral may be accepted if it is of comparable value and useful life and is acceptable to SBA or to a PLP Lender acting under its PLP authority. c. Adequacy of collateral i. A Lender may not take any action in connection with an SBA-guaranteed loan that establishes a preference in favor of the Lender (13 CFR § 120.411). A Lender must not have a 7(a) loan in a “piggyback” structure. a) Piggyback financing exists when one or more lenders provide more than one loan to a single Borrower at or about the same time, for the same or similar purpose, and the SBA-guaranteed loan is secured by a junior lien position or no lien position on the collateral securing the non-SBA loan or loans. Loans approved within 90 days of one another are considered approved at or about the same time. b) A structure is not considered piggyback financing when both the SBA-guaranteed loan and the non-SBA loan are for working capital and the non-SBA loan is secured only by working or trading assets. A pari passu lien position is also not piggyback financing when the maturity of the non-SBA loan is not shorter than the maturity of the SBA-guaranteed loan. c) A loan request must not be declined solely because collateral is inadequate. SBA recognizes that Applicants may demonstrate repayment ability even when they lack collateral sufficient to repay the loan in full upon default. However, the SBA guaranty is not a substitute for available collateral. d) When assessing collateral adequacy, the Lender must evaluate the impact of covenants and other recorded restrictions on collateral value and marketability and must document that analysis in the loan file. The review must include, as applicable, deed restrictions, easements, reversionary interests, subordinations, leases, options, engineering controls, and similar restrictions. Environmental indemnification provisions that run with the land are not eligible and must be removed or waived as to the Federal Government. d. Vehicles e. Except where a program specific requirement states otherwise, a Lender is not required to take a lien on a vehicle that already has a lien or whose value does not exceed $20,000 when the SBA loan number is assigned. Vehicle value may be supported by an independent third party source, including an orderly liquidation value from an appraisal, an independent vehicle valuation company or website, or the purchase price allocated to the vehicle when loan proceeds are used to acquire it. The Lender must document in the credit memorandum whether the vehicle was already encumbered and, if a lien is not required because of the value, the valuation source and amount. f. Personal Real Estate g. For purposes of any requirement to take available equity in personal real estate, the Lender is not required to take a lien when equity 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 placement of a junior lien does not, by itself, constitute “lack of equity” under SBA rules. The Lender must document a source other than the personal financial statement, or tax assessment value, supporting that determination. h. When a lien is required or elected on personal real estate, the lien may be limited to the collateral shortfall or to 150% of the equity in the property, as applicable. i. SBA has no specific appraisal requirements for non-commercial real estate taken to secure a personal guaranty. i. Valuation of fixed assets j. If the value assigned to fixed assets exceeds their Net Book Value, the Lender must obtain an independent appraisal from a qualified individual to support the higher value. The appraiser must be independent of loan production, may not participate in approving the transaction, and may not have an actual or apparent conflict of interest. k. A fixed asset valuation contained in a business valuation does not satisfy paragraph A.f.i., except when it is part of a going concern appraisal. l. Commercial real estate appraisal requirements i. The regulation governing commercial real estate appraisals is 13 CFR 120.160(b). The provisions in this paragraph apply whenever this Appendix requires an appraisal of commercial real estate. A program specific provision may permit an evaluation in lieu of an appraisal under the conditions stated for that transaction.

ii. Required appraisal standards: a) The appraisal must be prepared by an independent State-licensed or State-certified appraiser, be USPAP compliant, and be dated within 12 months of the application for guaranty. For federally-regulated Lenders, no exemption is granted under the Interagency Guidance Appraisal and Evaluation Guidelines dated December 2, 2010, for Transactions Insured or Guaranteed by a U.S. Government Agency. b) The appraiser must be independent of the loan production function, must not be involved in approval of the transaction, and must not have the appearance of a conflict of interest. c) If the estimated value of the commercial property exceeds $1,000,000, the appraiser must be State-certified. d) The appraisal must identify the Lender as the client and/or intended user, as those terms are defined in USPAP. Federally regulated Lender may follow their primary regulator’s FIRREA requirements to the extent those requirements permit otherwise. e) The Lender may not use an appraisal prepared for the seller or Applicant. The cost may be passed on to the Applicant. f) The appraisal must be an Appraisal Report prepared in accordance with USPAP.

iii. Construction, renovation and existing buildings a) For loans financing new construction or substantial renovation of an existing building, the appraisal must estimate the property’s market value upon completion. “Substantial” renovation means rehabilitation costs exceeding one third of the property’s purchase price or fair market value at application. b) Upon completion, the Lender must obtain a statement from the appraiser, general contractor, project architect, or construction management firm confirming that construction materially conforms to the plans and specifications supporting the original appraisal. If the Lender cannot obtain this statement, a new appraisal is required. c) If the new appraisal shows that the completed property’s market value meets or exceeds the original estimated value, no further action is required. d) If the Lender cannot obtain the required statement and cannot obtain a new appraisal showing that the property’s market value meets or exceeds the original estimated value: i) Before closing (e.g. refinancing bridge note): The lender may not close the loan without SBA’s prior written approval. ii) After closing, if the loan financed the construction period: (a) The Lender must notify the CLSC and work with the CLSC to determine an appropriate remedy, which may include additional equity or collateral. The notice must explain the reasons for the difference between the original estimated value and the completed property’s actual value and recommend a remedy to address the difference. If additional collateral is required, the Lender must identify its fair market value and liquidation value. e) If the loan will be used to acquire an existing building that does not require construction, the appraiser should estimate market value on an as-is basis. If the appraiser estimates the value other than on an as-is basis, the narrative must include an explanation of why the as-is basis was not used.

iv. Appraisal content and timing a) The appraisal may not include the contributory value of any rental income or the value of any intangible assets in valuing the collateral. b) An appraisal may be submitted as part of the loan application to assist with the underwriting or as part of the loan closing. In no case may the Lender rely on an appraisal that was prepared more than 12 months prior to the date of the application. c) If the Lender is going to require the appraisal at closing, the loan application must include an estimate of the value of the real estate and the estimate must be identified in the credit memorandum with the requirement for an appraisal that supports the estimated value at time of closing.

v. Closing when appraisal value is below the estimate a) If appraised value is 90% or more of the estimated value, the Lender may close the loan but must include a written explanation as to why the appraisal is less than the estimated value in the loan file; or b) If appraised value is less than 90% of estimated value, the Lender may not close the loan without SBA’s prior written permission (see exception below for PLP Lenders). The Lender’s justification to SBA must provide a sufficient understanding of the reasons for the differences in values between the estimated and actual values as well as a recommendation as to a remedy to offset the difference in values such as additional equity or additional collateral. If additional collateral is being required, the Lender must identify both the fair market and liquidation values of the additional collateral. c) PLP Lenders are permitted to close a loan when the appraisal is less than 90% of the estimated value but the Lender must include a written justification as part of its file that may be reviewed by SBA at time of guaranty purchase or when conducting lender oversight activities. The justification must include a thorough analysis by the Lender of the reasons for the appraisal being low and an explanation as to what steps the Lender took to offset the risk to SBA from the low appraisal such as additional equity or additional collateral. m. Change of ownership valuation requirements i. When loan proceeds will finance a change of ownership, the Lender must comply with the business valuation and appraisal requirements applicable to change of ownership transactions in Appendix 15 7(a) Changes of Ownership, including any required independent valuation thresholds, special purpose property requirements, and lender verification of financial information used in the valuation. n. Additional appraisal review for recent transfers o. For a business transferred within 36 months prior to the application date, the SBA requires: p. An appraisal of the business real estate that meets the appraisal requirements above; and q. Either a review of the appraisal by another appraiser selected directly by the Lender or a site visit by a senior member of the Lender’s staff. If the Lender is performing the site visit, the Lender must document the date of the visit and a description of the items reviewed on site.