My email inbox is full. Well, not totally, but pretty darn full. How come? It’s loaded with back-and-forth emails with a CDC client about one subject: Can a real estate development project be eligible for a 504 SBA loan? It all boils down to the primary source of revenue. Here’s the gist of our conversations. Hang on. It’s a winding road.

Mr. CDC. Richard, I’m working with a real estate developer who wants to build a building, with his development business occupying most of it, and lease the rest to other companies. Your last email surprised me. You said the developer isn’t eligible for SBA funding because the venture was speculative. What am I missing? The developer’s business will occupy the building. It’s not speculative at all.

ME. Ineligible. Check out the SOP.Businesses primarily engaged in subdividing real property into lots and developing it for resale on its own account are not eligible.” And “… businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible.” Also, an ineligible passive business cannot obtain an SBA loan for any purpose, including the purchase or construction of a building for its own use. (SOP 50 10 6, Section A. Part 2, Chapter 3, 3. A, a, b, c. pg. 142. And of course: 13 CFR § 120.110 s.).

MR. CDC. OK. So how about this one? A home builder wants to buy a building and put his business in it. So following your logic, he builds houses and some of them are built to be resold later. Isn’t that speculative?

ME. There’s nothing speculative at all.

MR. CDC. But Richard! The home builder built a model home, exhibiting what type of homes he builds. Surely that’s speculative.

ME. A home builder who doesn’t start building a home until there’s contract to buy it when construction is done isn’t speculating. The builder is building a home for a specific customer. Nothing wrong with that. Even when the builder sells that model home, or a group of model homes, if the income from that activity is not the primary source of revenue, the builder is not a developer. And so is eligible.

Summing Up. Everything depends on one key word: “Primarily.” If besides buying real estate for subdivision and resale, the developer also manages rental properties, the developer might be eligible. The crux: What’s the percentage of income the developer earns from development work, and what percentage is earned from property management? If most of the income comes from property management, then yes, the developer is eligible.

Even business owners who occasionally dabble in development could still be eligible. Just as one bad apple doesn’t necessarily spoil the bushel, neither does an occasional foray into development necessarily spoil eligibility. It all depends on whether the business is primarily involved in development, or whether it occasionally develops property.

What’s the Primary Source of Revenue? Once that’s determined, everything falls into place. All clear? This was fun. Let’s keep talking!

Richard Jeffrey
Senior Associate, CDC/504 programs