I don’t usually share my taste in music with my clients. Yet every now and then something sneaks out that gives them a hint. It happened the other day.

My client called with two construction projects: build an office building, and build a chicken coop. He was sure the office building was eligible and the chicken coop was not. He was surprised when I said the building was ineligible and the coop was eligible. And he told me so. I replied, “Things are seldom what they seem.”

CLIENT. Oh! That’s from “HMS Pinafore.” You must be a Gilbert & Sullivan fan.

ME. Methinks you’re galloping to a conclusion, but I must admit, you’re right. I’m not an Englishman, but Gilbert & Sullivan is my thing. The song, “Things are Seldom What They Seem” has other maxims like, “All that glitters is not gold” and “Here today, gone tomorrow.” So what’s all that have to do with office buildings, chicken coops and SBA? Here’s what:

SBA takes the position that if a business isn’t eligible for SBA financing, then SBA cannot make a loan to that business even for an eligible business purpose. In this case, the borrower sells real estate and of course real estate agencies are eligible. But the business also buys tracts of land for development purposes. They don’t have buyers lined up for that land yet. They’re speculating that they’ll get some.

Things are seldom what they seem. Here’s this big old gorgeous hunk of prime real estate for sale in a rapidly developing community and the real estate agency can buy it “dirt cheap.” They want to build offices for their agents and employees and sell the rest of the land for development. Because the business engages in speculation, it’s a “speculative business” and ineligible for SBA funding. You need to tell your borrower that although the project is eligible, the business is not. It didn’t seem that way at first. But it is true. “Things are seldom what they seem.”

CLIENT. Okay fine! But you told me the other day that we could make a 504 loan to Mamie MacDonald’s farm, and I thought farms weren’t eligible.

ME. When I hear that, I know that all is not fine with you. But onward. Here’s the lowdown on farms. Nothing in the SOP says that a farm enterprise is ineligible. SBA finances farms all the time. If you’re financing a farm’s operating expenses (equipment, seed, livestock and machinery) you have to use a 7(a). loan. But if you’re financing things like barns, hog and dairy facilities, and chicken coops, you can use a 504.

CLIENT. Wow! My first response would have been that chicken coops were ineligible. Things sure are seldom what they seem.

ME. Well, hold on. There may be an affiliation issue with SBA. Make sure that the farm is independent from the chicken supplier. It’s not the nature of the business that would make it ineligible. It’s the agreement it has with its suppliers.

CLIENT. Okay I get It. Office buildings can be ineligible and chicken coops can be eligible. Thanks, Richard.

ME AFTER THE FACT. As we hung up the phone, I hope he couldn’t hear me humming in the background: “Stick close to your desk and never go to sea. And you may be an expert on the SOP!” Very true. Very true.

Richard Jeffrey
Senior Associate, CDC/504 Programs

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