A spate of questions about residential property as part of a 504 project has been pouring in, None of them are about the usual suspect, a case where the first floor of a building is commercial and the second floor residential. We all know about that one. As long as 51% or more of the building is used for business, the project is eligible.
Recent questions from clients across the country are literally and figuratively all over the map.
QUESTION #1: “We have a situation where a business is buying four locations from the same seller, with the locations all in different parts of the city. Three of them are used for the business. The fourth is a residence. The business leases part of the residence and uses another part for storage. By far the majority of space under roof is business. Is the fourth location eligible?”
MY ANSWER #1: You’ve probably heard me say this before but if not, please remember that it is the “Small Business Administration”, not the “Small Landlord Administration.” SBA finances small businesses, which implies that the assets financed must be used by the applicant business. So a residence used as a residence is not used for business purposes. Therefore the SBA cannot finance the purchase of that asset. But hold on. There is an exception: The SOP allows for an exception if it’s necessary for the business owner to live on site (SOP 50 10 6 Chapter 3, page 166). But in this case, the fourth location is not “on site.” Nope. Sorry.
QUESTION #2: “Here’s our situation: a local business wants to buy two buildings that are on the same parcel, a large manufacturing facility and an apartment house. Rather than go through a parcel split, can’t we just finance the manufacturing building with a 504 loan and finance the apartment outside of the 504 loan structure?”
MY ANSWER #2: In this case, the CDC proposes that the borrower pay cash for the apartment house and finance the commercial property with a 504. Loan. Got a problem with that? You bet. They’re all part of the same project. The assets being financed have to be used by the applicant business. In the case of an apartment house, the business is not the user of the apartments: the apartment dweller is. The owner just collects rent. No, that’s not going to work. Get the parcel split. Next up:
QUESTION #3: “Help! I just closed on a 504 loan to finance the purchase of a Bed & Breakfast, and was about to do another one. But SBA now tells me these projects are ineligible. What’s changed?”
MY ANSWER #3: Not a thing. A B&B is eligible under the same conditions as a hotel (more than 50% of the business’s revenue for the prior year came from transients who stay for 30 days or less (SOP 50 10 6 page 142). Yet what’s been happening is that many Airbnb’s are applying chapter 2, for 504 loans and getting ruled ineligible by SBA. In part this is because the lender didn’t advert to that section of the SOP which requires a project to comply with all zoning requirements. Most Airbnb’s are zoned residential, so those properties cannot be used for business purposes. And you know why that makes them ineligible, right? Yep! It’s the Small Business Administration, not the Small Landlord Administration!
Keep those questions coming in. And stay safe.
Senior Associate, CDC/504 Programs