SBA rules · SOP 50 10 8.1

Can an SBA loan pay for leasehold improvements?

Yes, leasehold improvements are an eligible use of proceeds for both 7(a) and 504 loans, subject to specific lease-term minimums, collateral lien rules, and landlord documentation requirements.

Quoted from SBA SOP 50 10 8.1Every quote checked word for word

In detail

Eligibility and loan term: Leasehold improvements are eligible project costs, with 7(a) maturity capped at 10 years plus an additional period of up to 12 months if necessary to complete the improvements (or up to 25 years for improvements on a leasehold interest in land).
Lease term requirements: When $500,000 or 30% of loan proceeds (whichever is less) will be used for leasehold improvements, or when that threshold of collateral consists of leasehold improvements or attached fixtures/equipment, the lender must obtain a written lease; for 7(a) loans, the term including options to renew exercisable solely by the borrower should equal or exceed the loan term, while for 504 loans, it must equal or exceed the loan term.
Assignment of lease and landlord waiver: An assignment of lease and landlord's waiver should be obtained for both programs; if the lender cannot obtain them, the lease term (including tenant-only options) must equal or exceed the loan term, and the lender or CDC must document its attempt and the reasons in the file.
Collateral and lien position: Under 7(a), the lender must obtain a first lien on assets improved with proceeds unless existing debt is ineligible for 7(a) refinancing or is on reasonable terms; under 504, because leasehold improvements offer minimal collateral value, the CDC must consider requiring additional collateral.
Ground lease and landlord reimbursements: When improving a leasehold interest in land, the ground lease must include required clauses such as encumbrance rights and foreclosure assignment provisions, and any landlord tenant-improvement reimbursement must pay down the loan unless factored into working capital adequacy.

The source

What the SOP says

“When the Borrower is operating in leased space and $500,000 or 30% of loan proceeds (whichever is less) will be used for leasehold improvements or when $500,000 or 30% of the proposed collateral (whichever is less) consists of leasehold improvements, fixtures, machinery, or equipment that is attached to leased real estate:

SOP 50 10 8.1, Chapter 3: Uses of Proceeds > Responsibilities When the Borrower is Leasing Space (lines 839-845)✓ Verified

“The SBA Lender must obtain a copy of the written lease between the Borrower and the landlord. For 7(a) loans, the lease term, including renewal options exercisable only by the Borrower, should equal or exceed the term of the loan. For 504 loans, the lease term must equal or exceed the term of the loan. An assignment of lease and Landlord’s waiver should be obtained.

SOP 50 10 8.1, Chapter 3: Uses of Proceeds > Responsibilities When the Borrower is Leasing Space (lines 839-845)✓ Verified

“If the SBA Lender is unable to obtain the assignment of lease or landlord’s waiver, for both 7(a) and 504 loans, the lease term, including renewal options exercisable only by the Borrower, must equal or exceed the term of the loan. Additionally, the SBA Lender must document in its file its attempt to obtain the assignment and the landlord’s waiver and the reason(s) for not obtaining them.

SOP 50 10 8.1, Chapter 3: Uses of Proceeds > Responsibilities When the Borrower is Leasing Space (lines 839-845)✓ Verified

“Loans for leasehold improvements (except for leasehold interests in land) may not exceed 10 years, plus an additional period reasonably necessary to complete the leasehold improvements, as determined based on the specific nature of the leasehold improvements, but in no case more than 12 months.

SOP 50 10 8.1, Appendix 17: 7(a) Loan Maturity Requirements > General Requirements (lines 5377-5383)✓ Verified

“Because leasehold improvements provide minimal collateral value, the CDC must consider requiring additional collateral.

SOP 50 10 8.1, Chapter 1: Eligibility through Submission of Application > Adequacy of Collateral: (lines 3579-3588)✓ Verified

“When loan proceeds are used to acquire, refinance, or improve assets, the Lender must obtain a first lien on those assets, subject to the following exception: When loan proceeds will be used to improve assets, a subordinate position is acceptable for the loan if the existing debt is ineligible to be refinanced with a 7(a) loan, or if there is existing debt on reasonable terms (e.g. if the Borrower has an existing loan for the purchase of a building and is getting a new 7(a) loan for improvements), in which case the Lender must document this fact in its credit memorandum.

SOP 50 10 8.1, Appendix 19: 7(a) Collateral Requirements > The loan must be fully secured (lines 5642-5656)✓ Verified

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