From-time-to-time I hear from CDC execs who aren’t happy with the assistance I’ve provided to their teams. This exec was hopping mad:

The CDC Exec. You always say that everything you need to know about SBA eligible borrowers is summed up in the name of the Agency: U. S. Small Business Administration. But the other day you helped one of our loan officers structure a loan where the borrower was an individual, not a business. How could you do that?

Me. Well, nobody’s perfect. Yet before you jump to conclusions, read on. I’m full of aphorisms like that. In fact, students in my Credit classes who have gone on to teach credit. use my aphorisms to train a new generation of lenders. Yes. The name of the Agency tells you almost everything you need to know about SBA eligibility: SBA finances businesses. But think about it: The moment someone offers goods or services, that person becomes a business: A sole proprietorship. Remember when you had that yard sale?  You were a sole proprietor. You filed that Schedule C, right?

The situation the exec is unhappy about concerned a woman who converted a residence into an Assisted Living Center. Title to the real estate was in her name personally and the business leased the building from her. She had a hard money loan and wanted to do a Refinance Without Expansion. All the credit metrics were fine but the loan officer couldn’t get over the fact that the owner, individually, was the borrower.

Easing her conscience by advising her to have co-borrowers would have saved me from the wrath of her boss. But it also would have robbed the loan officer and her boss of the chance to expand their SBA knowledge. Here goes:

SBA says is that the loan applicant must “Be an Operating Business (except for Eligible Passive Companies)”. (SOP 10 5 6. Part 2, Section A, Chapter 1, pg. 117) and goes on to explain “(a)n EPC can take any legal form or ownership structure (e.g., corporation, partnership, LLC, sole proprietor, tenancy in common, etc.” (pg.133).

So the owner is Maria Smith. She will borrow the money using a 504 loan. The borrower is Maria Smith. She owns Maria’s Assisted Living Facility. The business leases the building from her. The EPC is Maria Smith and the OC is Maria’s Assisted Living Facility. Life couldn’t be simpler, right?

The Loan Officer. I don’t believe it! Maria Smith has to file a d/b/a because she’s doing business!!

Me. Nope. SBA doesn’t tell people what form their business has to take. Her attorney might tell her, but that’s his job. SBA will not tell her one way or the other because it doesn’t matter to them.

The Loan Officer. Wait, Richard. If she is an EPC she cannot engage in any other business activity, right?  That means she cannot own another business, or even own and lease another property. And she owns a shop next door that sells chocolate. So she is not eligible!

Me. I sure am glad that lenders realize that SBA changed the SOP a few years ago, and that an EPC cannot be involved in any other business activity than leasing to an operating company. If an EPC owns multiple properties, it cannot lease to multiple operating companies. It can lease to one: Only One.

But hold on! That rule doesn’t apply if the EPC is an individual. An individual may own multiple properties and lease each to a different OC. SBA has the same provision if the EPC is a trust.

Everybody happy now?

Richard Jeffrey
Senior Associate, CDC/504 Program

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