How does the SBA handle lien removal on real estate?

July 01, 2023

by a searcher from Purdue University in Phoenix, AZ, USA

I am taking out a $600k SBA loan on a home staging business. The SBA lender is asking for the following collateral:

Primary residence (asking for $380k lien, value $700k, mortgage remaining $190K)

Investment property (asking for $110k lien, value $470k, mortgage remaining $280k)

Vacant lot (asking for $78k lien, value $500k, mortgage remaining $170k)

Collateralized the entire business assets, worth somewhere between $600k and $1m which they are giving me about $30k credit for (treating rental furniture as "furniture and fixtures" giving me 10% of balance sheet's depreciated value.) Since they are not treating it as "equipment" I don't have the option to get an appraisal, either.

I have a pretty good idea how they will handle primary residence transactions - I'll be able to sell and buy a new house but I'll need to move the lien to the new house.

Can I 1031 exchange the investment property and move the lien to the new property?

Can I give them $78k principal reduction and ask them to release the lien on the vacant lot?

Thank you hivemind :-)

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

If you look to sell a property and buy another property, you can certainly do that. However, typically the SBA and lender require the proceeds from the sale to come into an account at the Bank to be held as collateral until disbursed into the new property###-###-#### exchange funds usually go to an intermediary and I do not believe they can be pledged as collateral, which will likely make it an issue for a Bank to allow you to use a 1031-exchange. So that likely would not be an option.

Sheila is right, whenever the collateral is getting changed the SBA lender must do an updated assessment to be sure they are still properly collateralized. If you have paid down debt and the other collateral values are holding up or potentially have even increased, they can release excess collateral at a future date. However, there is nothing that requires them to do so. If the Bank still deems there is a credit risk, there is nothing that requires them to release collateral until the loan is fully paid. The Bank does not need to run it past the SBA. They can use their PLP authority of they are a Preferred Lender Provider, but some may still choose to run it by the SBA to protect themselves.

The formula to determine collateral with the SBA really only provides value to fixed assets (real estate, equipment and a very limited advance against FF&E). Which is why often times personal collateral stays part of the deal for an extended period of time. Please let me know if you would like to discuss further. You can ping me here or directly at redacted Good luck with your financing.

Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA

When an SBA lender takes a lien on your real estate assets, anytime you request a change to the collateral, the lender must do a "servicing" action and depending on the amount may need to run it through the SBA for approval. So the answer is, it depends upon the lender's and perhaps SBA's opinion of the amount of collateral pledged as compared to the loan balance, the performance of your loan over time, company financial performance, etc.

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