Following up on my recent eBulletin where I responded to a client’s question, I like the idea that it was a real-life question from a real-life client. And that I had an answer! Here’s another real-life question from one of our clients:

Q: Hi Richard. We have a situation where an Eligible Passive Company (EPC) owns a business with three subsidiaries. Each subsidiary rents its location from the EPC. Now the EPC wants to buy a building for its corporate headquarters. It will lease the building to two of its subsidiaries. The remaining subsidiary is in another state and of course will not occupy the new building. Is the purchase of the new building eligible for an SBA loan?

A: Ineligible. Here’s why: The EPC receives rent from an entity other then the Occupying Company (OC/the non-local subsidiary). As stated in SOP 50 10 5 (J), “An EPC (excluding a trust) may not engage in a business activity other than leasing the property to the OC.” (See Subpart B, Chapter 2, III. Eligible Types of Businesses, D 3 iii d, pg. 118 for 7(a) loans and Subpart C, Chapter 2, III. Types of Eligible Businesses, C 7 d pg. 295 for 504 loans.)

While the out-of-state company may be in operation, it does not meet the definition of an Operating Company (OC) for SBA because it will not be occupying the new premises. To be eligible, the out-of-state OC must lease and occupy the project property along with the other companies. And of course as an OC, it will have to guaranty the loan.

It’s interesting that while SBA says that the EPC has to lease the entire building to the operating companies, and that the operating companies have to occupy 51% of the space (60% for new buildings), it does not specify how much space each single OC has to occupy, Can the out of state OC lease desk space and have one of its employees work there? Hmm!

I appreciate the opportunity to answer your questions and of course to assist you with your SBA 504 loan programs. Keep ’em coming! Contact me directly or Contact JRB.

Richard Jeffrey
Associate CDC/504 Programs
J.R. Bruno & Associates