Can a Lender use a 7a Guaranteed Loan to Finance the Purchase of Real Estate it Owns?

Jessica SarterCommercial Lending

REO property

This question generally will involve real estate that the lender has obtained through foreclosure on a defaulted loan, with the real estate now being held as Other Real Estate Owned (“OREO”). Clearly it would assist the lender and SBA in achieving maximum recovery from the sale of this OREO if the lender could finance part of the purchase by the buyer with an SBA loan.

This is permissible under SOP 50 10 5 (F) provided certain procedures are followed and conditions are met:

1. The loan may not be processed using the lender’s delegated (PLP) authority.
2. An independent appraisal meeting SBA requirements must be obtained providing a liquidation value for the real estate.
3. The lender must provide an explanation regarding lender’s acquisition of the property. For example, if the property was acquired in a foreclosure because the business failed, the lender should provide justification to support why the new buyer will succeed at that location.
4. The applicable guaranty amount (e.g. 75% for a 7a loan) will be calculated using the lower of the sales price, the liquidation value or the lender’s cost basis in the real estate (i.e. mortgage balance plus care and preservation expenses).