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Wednesday, July 2, 2008

Daily Observations - SBA & Leases

One of the most important aspects of a new or existing business is their lease. A proper lease can increase the value of a business and an improper lease can cause a business valuation to be significantly lower. It all depends on the type of business, the location of the business and the current landlord.

With an SBA Loan assuming the loan is for the purchase of a biz op (business opportunity) the lender will not lend unless there is a long term lease in place. The length of the lease has to be commensurate with the term of the loan. For example, a seven year working capital loan must have a lease the equivalent of seven years. The lease can be a five year with a five year option. Therefore the current lease term does not have be the length of the lease but the current term plus written options to renew must be at least the length of the term of the loan.

For a purchase of a biz op the average length is ten years therefore the length of the lease should be ten years as well. There are however exceptions and they have to do with, is it crucial that the business be at this particular location. This caveat mainly affects retail businesses that are established and a move if required would surely mean diminished cash flow.

The other main point about leases as it relates to SBA Loans is the requirement that the current landlord must sign a waiver known as the landlord waiver. This agreement gives the lender the right to be in first position over the landlord so in the event of a default the SBA lender gets to grab whatever collateral there is before the landlord can perfect their legal rights.

It is my recommendation from years of experience that the discussion of the landlord waiver should happen early in the transaction and do not wait till the end of the loan approval process to discuss this. SBA will not close a loan unless the landlord waiver is signed and executed. Read on for more Eligibility Requirementsfor an SBA Loan.

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