Sometimes I get a question that’s nice and short, but requires an extensive answer. Johnny Wayne, a relatively new lending officer, called me the other day with situation just like that.
Johnny. Richard, I have a deal going, an equine vet practice, that wants to buy and locate the practice on a 23-acre property. They don’t do any farming and have no intention of farming, though they might want to rent out the land to crop growers. The property consists of a house and a barn. The vet will live in the house and the barn will be converted to the vet offices, waiting room, and treatment space. It will also include stables for horses that need to stay overnight. The vet will live in the house. Is this eligible for a 504 loan and if so, is it Special Purpose?
Me. Whoa, there. We need to discuss all sorts of things. And as I tell every new lender I’ve ever trained. “Let’s begin by defining your project.”
In this case a Veterinary practice wants to purchase 23 acres for its new veterinary clinic. From that, other things follow. Since you make business loans, your borrower is the business, the veterinary clinic, and it must own or lease from an EPC 100% of the property. Any portion of the property that is not occupied by the business must be sublet by the business. So if part of the property will be occupied by the vet, it has to be sublet from the business.
Johnny. OK. Right. So is it Special Purpose?
Me. Hold on. I’m reining you in. Before we go there, we need to distinguish between eligible and ineligible costs. We might have an issue of excess land here. Excess land is that portion of the land that isn’t necessary for operating the business. The business needs the space under roof, some driveways, maybe a corral for the horses to get some exercise, a place to dispose of waste and perhaps an easement to remove the waste from the property. So far, I don’t think the business operations need anywhere near 23 acres.
We could argue that some ground is necessary for horses to graze. I have no idea how much pasture is needed. When I was in Arizona, I learned it took four acres for a cow, but that was in the middle of the desert! Even so, adding all the business needs together, it doesn’t look anywhere near 23 acres. So your project has to be adjusted to include just the land used for the business. The rest of the land is excess land. And the cost of excess land is ineligible for financing. The borrower will need to pay cash or the excess land will have to be subdivided from the total land.
Now your project is to finance a veterinary practice that wishes to purchase a house and building on less than 23 acres and convert the building to be used as a veterinary clinic.
Johnny. OK then. Is it Special Purpose?”
Me. Let’s go back to how much space the business has to occupy. I know there is remodeling, but is part of the project constructing a building or an addition to the building from the ground up? That would make it new construction and the business would have to occupy 60% of the space right away and 80% in ten years. But if the remodeling doesn’t involve ground up construction, then it’s the remodeling of an existing building and the business must occupy only 51% immediately and the balance can be leased out in perpetuity.
Johnny. So Richard! Is the building Special Purpose or not?”
Me. Hold on! One more thing. There is actually a special exemption for horse boarding facilities in the SOP! “If the nature of the business requires that the manager live on premises at all times, then the square footage of the residential space must be appropriate to the needs of the business, not to exceed 49% of the total property …” regardless of whether it’s new construction. And the example the SOP gives is a horse-boarding facility! In which case, the manager would live in the residential property which makes it occupied by the business. [SOP 50 10 5 (K) Chapter 2, IV., H. 2, f. pg. 322]. Pretty neat!
Johnny. DUDE! Special Purpose?
Me. Oh yeah. Your original question. Well veterinary clinics aren’t on the list on page 271 of SOP 50 10 5 (K), so unless the appraiser says that this property has a special design or layout, it is probably not Special Purpose.
Movin’ right along … keep your questions coming!
Senior Associate, CDC/504 Program
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