Buy a Biz with SBA: Mastering Landlord Requirements

Hey there, aspiring small business buyers -

It's Deb here, your go-to expert in navigating the SBA 7(a) business acquisition loan landscape. I'm your business buyers' ally.

Today, I am sharing crucial insights on an aspect that many business buyers and business brokers overlook: Landlord Lease Agreements, Waivers, and Subordination.

If you're planning to buy a business that uses rented commercial space, you'll need to create a new lease agreement under the name of the new owner. This agreement must be carefully written, thoroughly reviewed, and then approved by both the SBA underwriter and the bank's legal team.

The Standard Operating Procedures (SOP) of the SBA outline specific requirements for new leases that must be followed by the new owner, agreed upon by the landlord, reviewed and approved by the bank providing the loan capital as a condition to clear prior to loan closing.

Here are the details:

Lease Term Requirements – Flexibility is Key

When aiming for that SBA 7(a) business acquisition loan, it's vital to align your lease terms. Your lease should match or exceed the length of your 10-year SBA loan term. The good news is, there's room for flexibility. You can opt for a shorter lease with options to renew. For instance, a 5-year lease with a 5-year extension works well for a 10-year loan.

Why the Landlord Waiver? – Securing Your Safety Net

The landlord's waiver is more than just a formality; it's a crucial part of your loan security. This document confirms that your business location can be used as collateral for your loan. Tangible assets of the business are located in the leased space. The landlord waiver is essential as it grants your bank lender the right to protect their investment in case of unforeseen circumstances.

The Power of Subordination – Lining Up Your Ducks

Subordination is an essential legal concept that prioritizes financial claims. In the context of your SBA loan, it ensures that your lender's claim takes precedence over others, including your landlord's, in case of default. This agreement is necessary to maintain clear lines in financial matters.

Getting Your Landlord on Board – The How-To

To secure these essential documents, start by discussing with your landlord. You'll need to present your loan application, appraisal report, and loan commitment letter. Remember, it's crucial to begin this process early to avoid any last-minute issues.

Why This Matters – Your Business Growth

Grasping these requirements is not just about compliance. It's about empowering yourself with knowledge for a smooth business journey. Proper preparation is key to unlocking your dream business with an SBA loan.

Landlord Lease Decline

Over time, I've seen landlords decline to renew business leases for various reasons. These can include their plans to sell the property or their intention to significantly raise the rent. This is precisely why you, as the prospective buyer of a business, need to initiate lease negotiations as early as possible.

In my experience, some landlords hire large third-party service providers, particularly in multi-tenant buildings. These providers often have notably slow response times during lease negotiations for reasons like high demand, new tenant background checks, and limited staff support. This is yet another reason why business buyers should start negotiating leases early, to avoid any delays in closing their loan.

It's Your Bus - Drive It

Be cautious when a business listing broker assures you that 'everything will be fine with the new landlord' or claims that 'they don’t expect any major changes to the lease'. Relying solely on someone else's word about the lease is like walking a tightrope over potential disaster. It’s essential to verify and understand lease terms yourself to avoid unforeseen challenges. Remember, you're in the driver's seat of this venture, so steer it wisely.

In my experience, I've encountered some challenging landlord negotiations that only surfaced at the eleventh hour. Take one instance where a landlord decided to double the rent for the new business owner. This was a drastic move, considering there hadn't been a rent increase for over a decade. Such a steep hike in rent expenses could severely impact the business's historical debt service coverage ratio. This, in turn, might lead to a late-stage loan denial – a real setback for any business buyer.

In another case, a business listing broker advised the buyer against contacting the landlord until the last moment, assuring him that the landlord would be agreeable to SBA terms. Unfortunately, my client didn't inform me about these developments. If he did, I would had thrown a flag on the play immediately.

Eventually, it came to light that the landlord, nearing 90 years young, intended to sell the property since his children were not interested in taking over the property. They preferred the immediate cash today from a building sale. This last-minute revelation and behind-the-scenes maneuvering resulted in a significant waste of time and money, leading to a deal that ultimately fell through. These experiences underscore the importance of transparency and timely negotiations in real estate lease transactions involving business acquisitions.

Final Thoughts – Your Business, Your Future

As you navigate through the complex world of business acquisition financing, backed by the SBA, remember that being informed by an experienced consultant is your greatest asset.

If you ever need guidance or advice, know that I'm here to support your journey to business acquisition funding success.

Book an appointment with me today.

Until next time,

-Deb Curtis

Your business buyers' ally.

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