Bottom Line
The CBC SBA 7(a) LOI is the correct structure — but not an option you can partially use. SBA rules require 1st lien position on real property, which means CBC must retire the existing TCB first TD to take 1st position. You cannot use this loan to replace only the MEZZ. The structure as proposed (refinance both TDs, $3.066M) is therefore the minimum viable transaction. Two critical risks: (1) the appraisal condition requires ≥$4.725M vs. the existing Colliers figure of $4.6M, a $125K gap; and (2) the IRBMB MEZZ matures May 1, 2026 — well before SBA can close. An IRBMB extension is likely required as a bridge.
Your Core Question — Can You Replace Only the MEZZ?
The IRBMB mezzanine loan ($1.2M, maturing May 1, 2026) is cross-secured by personal real property at 2914 Emerson Street, Palo Alto. CBC's LOI references it as "CRE — 2nd TD" — meaning CBC believes it also holds a deed of trust position on 10403 High Street. Whether or not the IRBMB has a lien on Horan House, the SBA lien position rule produces the same outcome:
Why You Cannot Use SBA 7(a) for MEZZ Only
SBA Standard Operating Procedure (SOP 50 10) requires the lender to hold a first lien on all real property securing the loan. If CBC took a 2nd TD position behind TCB's existing 1st, SBA would not guarantee the loan. CBC must retire the TCB 1st TD and step into 1st position — making the all-in refinance the only SBA-compatible path.
Analogy: It's like asking the SBA to be a junior partner in a deal — the program is structured so taxpayers are protected first. SBA won't be a subordinate creditor.
Alternative Paths to Replace Only the MEZZ
Option A: Request IRBMB extension from Ronald Elvidge (they extended once already — July 2024 → May 2026). Buys time while the SBA process completes.
Option B: Conventional 2nd TD lender replaces IRBMB with a new note. Higher rate, shorter term, but no SBA complexity. TCB may resist subordination.
Option C: Proceed with CBC all-in refinance as proposed. Clean exit from all construction debt. Recommended.
LOI Term Sheet
| Term | CBC Proposal | Assessment |
|---|
| Lender |
Commercial Bank of California (CBC) |
Known Diana Kershaw / David Tavedich relationship |
| Loan Amount |
$3,066,000 |
Covers both TDs + $83.7K SBA guaranty fee + soft costs |
| Program |
SBA 7(a) — Standard (>$350K) |
75% SBA guarantee; qualifies for 25-year term |
| Interest Rate |
WSJ Prime + 1.75% → 8.50% indicative |
Variable, adjusts quarterly. Prime currently 6.75% |
| Term / Amortization |
25 years | 1 IO + 299 P&I |
Fully amortizing — no balloon risk |
| Monthly Payment |
~$24,712 (at 8.50%) |
vs. ~$22,800/mo current (TCB + IRBMB combined) |
| Appraisal Condition |
≥ $4,725,000 required Risk |
Last Colliers = $4.6M. Gap = $125K. New appraisal ordered. |
| DSCR Requirement |
1.25x (business) | 1.15x (global) |
TCB required 1.40x — CBC is more favorable |
| SBA Guaranty Fee |
$83,731 Cost |
Rolled into loan — ~2.7% of loan amount upfront cost |
| Prepayment Penalty |
5% / 3% / 1% (Yrs 1–3) |
None thereafter. Favorable vs. conventional 5-10 yr penalties |
| Required Deposit |
$12,000 — due March 19, 2026 |
2 days. Non-refundable if deal fails in diligence |
| Collateral |
1st Deed of Trust, 10403 High St. + UCC-1 |
Personal collateral (Emerson St.) released on IRBMB payoff |
CBC SBA 7(a) LOI Analysis — Financial Deep Dive
Current Cap Stack vs. Proposed
| Position |
Current (Today) |
Proposed (Post-CBC) |
| 1st TD |
Tri Counties Bank | $1,780,000 | 5.25% (resets Jul 2027) | ~$10,800/mo |
CBC SBA 7(a) | $3,066,000 | 8.50% variable | $24,712/mo |
| 2nd TD / MEZZ |
IRBMB LLC | $1,200,000 | IO $12,000/mo | Due May 1, 2026 |
— Retired — |
| Total Debt |
$2,980,000 |
$3,066,000 (includes $83.7K SBA fee + soft costs) |
| Monthly Debt Service |
~$22,800 |
$24,712 (+$1,912/mo) |
| Personal Collateral |
Emerson St. (Palo Alto) cross-secured by IRBMB |
Released — IRBMB retired at closing |
| Maturity / Balloon Risk |
IRBMB due May 1, 2026 → immediate risk |
No balloon — 25-year fully amortizing |
The Appraisal Gap — Highest Risk Item
Appraisal Requirement Analysis
CBC Required Minimum Appraisal$4,725,000
Existing Colliers Appraisal (most recent)$4,600,000
Gap to Clear Condition($125,000)
Implied LTV at $4.6M (current)66.7%
Implied LTV at $4.725M (required)64.9%
The appraisal condition is binary — if the new bank-ordered appraisal comes in below $4.725M, the deal dies unless restructured. Horan House has been significantly improved since the prior appraisal; however, a new appraisal ordered today reflects current rates and market conditions. If it misses:
If Appraisal Comes in at $4.6M
Loan proceeds must be reduced to maintain 64.9% LTV: $4.6M × 64.9% = $2,985,400 max loan. Trevor would need to bring ~$80K cash to cover the SBA guaranty fee and soft costs above this threshold. Or negotiate with CBC for a slightly higher LTV — the 64.9% was derived from their $4.725M floor, not a fixed ratio rule.
If Appraisal Comes in Below $4.6M
More significant restructuring required. The Colliers relationship and updated property (completed renovations, operating revenue) should support value. Key question for CBC: what is their fallback structure if appraisal falls short? Will they reduce the loan amount vs. decline entirely?
TCB Prepayment Penalty — Hidden Cost
Tri Counties Bank Prepayment Penalty Estimate
TCB loan originatedJuly 2022
Prepayment schedule5/4/3/2/1 with reset
Current year (Month 45)Year 4 — 2% penalty
Estimated outstanding balance~$1,780,000
Estimated Prepayment Penalty~$35,600
This cost is not rolled into the CBC loan — it must be paid at closing. After July 2026, the TCB penalty drops to 1% (~$17,800). If CBC cannot close before July, delaying until August saves ~$17,800 — but that conflicts with the IRBMB May 1 maturity.
Payment Comparison
| Scenario |
Monthly P&I |
Annual Debt Service |
Rate |
| Current (TCB + IRBMB combined) |
~$22,800 |
~$273,600 |
Blended ~6.8% |
| CBC Proposed (8.50%) |
$24,712 |
$296,544 |
8.50% variable |
| CBC if Prime drops to 5.75% (Prime −1.0%) |
~$22,200 |
~$266,400 |
7.50% |
| TCB rate reset (Jul 2027) if 5-yr Treasury stays elevated |
~$14,200 |
~$170,400 |
~8–9% (TCB 1st only) |
Note: TCB rate reset in July 2027 at 5-year Treasury + 2.75%. If Treasury sits at 4.5%, that's 7.25% on the $1.78M first — still lower than the CBC all-in. The all-in CBC refinance makes sense primarily to eliminate the IRBMB balloon risk and release the Palo Alto personal lien.
CBC SBA 7(a) LOI Analysis — Risk Matrix & Call Preparation
Risk Matrix
Appraisal falls below $4.725M
High
Medium
Use updated revenue data, completed renovation comps. Ask CBC: "If appraisal misses by <5%, can we reduce loan amount vs. decline?"
IRBMB matures May 1 before SBA closes
High
High
Request 90-day extension from Ronald Elvidge immediately. IRBMB already extended once. Frame as: "SBA closing in progress — committed."
DSCR falls short of 1.25x on business underwriting
Med
Medium
At $24,712/mo, need $370K+ annual NOI. Horan House at stabilized run-rate should clear this. Provide 2025 actuals + forward bookings to CBC promptly.
SBA owner-occupancy requirement (51% rule)
Med
Medium
SBA requires 51% owner-occupancy. Guesthouse operating the property as its flagship qualifies as the operating business. Confirm with CBC how they're structuring the occupancy representation.
Rate increases further (Prime rises)
Med
Low
Payment resets quarterly with Prime. Market consensus is Prime flat-to-declining in 2026. Ask about rate cap or fixed-rate option (some SBA lenders offer fixed).
$12,000 deposit at risk if deal fails diligence
Low
Low
Non-refundable if deal fails. Primary diligence risk = appraisal. Manageable given alternatives (IRBMB extension, conventional refi).
Questions for the Bank Call
Question 01 — Lien Position
"Is there any SBA 7(a) structure that would allow you to be in 2nd position behind TCB's first, and refinance only the IRBMB mezzanine?"
Expected answer: No. SBA SOP requires 1st lien. But confirm explicitly so you understand why the all-in structure is required. Also establishes whether a non-SBA 2nd TD from CBC is on the table.
Question 02 — Appraisal
"If the new appraisal comes in at $4.6M rather than $4.725M, what are our options — can we reduce the loan amount and bring cash, or does the deal restructure entirely?"
The $4.725M threshold is driven by their 64.9% LTV calculation. A $4.6M appraisal = 66.7% LTV — only 1.8% over. A modest cash injection or loan reduction could solve this. Know the exit before paying the $12K deposit.
Question 03 — Timeline & PLP Status
"Is CBC a Preferred Lender Program (PLP) lender? What is your realistic close timeline — specifically, can we close before May 1, 2026?"
PLP lenders can approve internally without SBA review (5 business days vs. 5-10). Non-PLP adds weeks. If CBC cannot close by May 1, you need the IRBMB extension in parallel. Understand their track record on SBA close timelines.
Question 04 — Rate & Fixed Option
"Is a fixed-rate option available on this loan? If not, what's the floor on the spread — could this be Prime + 1.5% given the collateral quality?"
SBA 7(a) loans allow negotiated rates up to the SBA maximum. Prime + 1.75% is not the ceiling for the bank — it's their opening offer. On a $3M+ loan with a Colliers-appraised asset, a tighter spread is negotiable. Even 25bps saves ~$7,500/yr.
Question 05 — Owner Occupancy Representation
"How are you structuring the owner-occupancy requirement for Horan House as a premium hospitality property? What documentation does SBA require?"
SBA requires 51% owner occupancy. As an operating hospitality business, Guesthouse qualifies — but the occupancy test is typically measured differently for hotels/hospitality vs. standard commercial. Confirm the SBA district's position before the deal progresses.
Question 06 — Cross-Collateral Release
"At closing, the IRBMB payoff releases the deed of trust on our personal Palo Alto property. Is CBC requiring any personal real estate collateral beyond the personal guarantee?"
SBA requires personal guarantees but only takes personal real estate if business assets don't fully secure the loan. At $3.066M vs. $4.6M+ appraised value, the loan should be considered "fully secured" — meaning no lien on Emerson St. Confirm this explicitly.
Immediate Action Items
| Priority | Action | By When | Owner |
|---|
| 🔴 URGENT |
Call CBC (Jason DiLuigi / Diana Kershaw) — ask Questions 01–03 above before submitting deposit |
Today, March 17 |
Trevor |
| 🔴 URGENT |
Contact Ronald Elvidge (IRBMB) — request 90-day extension of May 1, 2026 maturity as SBA is in process |
March 18–19 |
Trevor |
| 🟡 High |
Submit $12,000 deposit to CBC by March 19 deadline (only after call clarifies appraisal fallback) |
March 19 |
Trevor |
| 🟡 High |
Gather 2025 Horan House P&L actuals + Q1 2026 bookings for CBC underwriting package |
Within 1 week |
Trevor / Marta |
| Standard |
Request Colliers updated appraisal (or provide CBC-required appraisal firm with all renovation documentation) |
After deposit submitted |
Trevor |
| Standard |
Confirm SBA Business License condition (Item 5 of CBC conditions) — obtain or prove Guesthouse has active license |
Before funding |
Trevor |