Is SBA 7(a) 100% CRE Financing Prudent Lending?

June 4, 2015

By Bob Coleman
Editor, SBA Marketing Trends Thursday

SBA Marketing Trends Thursday

I received plenty of comments regarding last week’s reporting of SBA lenders who are offering 100% financing for commercial real estate for certain white collar professionals.

The first one…

“Hi Bob, Is this morning’s brief news or a paid advertisement?”

And, “How does this align with SBA policy?”

Finally, “Is 100% commercial real estate financing really the best way to attract business (stretching normal underwriting requirements in an effort to differentiate one’s institution from the pack)?

“While I get that professional businesses likely have better performance records than the average business, I don’t believe this is in the industry’s best interests or consistent with prudent lending practices. And SBA is OK with this?”

The answer is in the SOP.

The overarching rule is SBA’s SOP demands a lender engage in prudent lending. If there is a loss, the lender must defend its initial underwriting decision as being prudent.

What guidance does the SOP give to lenders regarding 100% SBA 7(a) CRE financing?

Unlike the SBA 504 loan program stated minimum equity requirements of 10% and 15%, SBA does not demand a minimum equity injection for the purchase of commercial real estate with 7(a).

However, SBA does demand the lender to take all available collateral to fully secure a loan.

SBA considers a loan as “fully-secured” if the lender has taken security interests in all available fixed assets 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. “Net book value” is defined as an asset’s original price minus depreciation and amortization. (SOP 5010 H, Page 165)

Real estate can be valued at 85% of the market value for the calculation of “fully-secured.”

For 100% CRE financing, the lender must close the collateral shortfall gap.


The SOP suggests the personal residence of the borrower be offered as additional collateral.

If there is a collateral shortfall (not fully-secured) on the SBA-guaranteed loan, the lender may include trading assets as necessary (using 10% of current book value for the calculation) and will be required to take available equity in the personal real estate of the principals. Liens on a personal residence or investment property may be limited to the amount of the collateral shortfall.

But remember, all of the lender’s decisions must defended as “prudent” lending.

If there is a default and loss, Herndon will be very interested in examining the underwriter’s initial collateral availability calculations if the only collateral is the CRE.