With a nod to Ricky Ricardo, often JRB reader questions need lots of ‘splainin’. Like this one that came in the other day. Hang in there:

 Patience Lender. Richard, SBA is so inconsistent!  Last year SBA approved a loan for one of our customers who is a home builder. Now SBA tells me that home builders are ineligible. Help me out here! I need an answer right away. Did something change?

Me. Hello, Patience. Thanks for your question. My answer will take some patience on your part. So please be patient. For starters, there’s been no change in the SOP. It’s just that some home builders are eligible, and some aren’t. That’s because some home builders are speculative and some aren’t. And as you know, speculative businesses aren’t eligible.

Here’s the difference:

  • Just For You. Like many residential builders. Ms. Just For You builds only custom homes. She’s a contractor. Somebody says “build me a house,” and Ms. Just For You gets to work. Or she might have a couple of model homes sitting on lots she owns. Buyers can walk through and say “I want the Cambridge model” or “I want the Sussex model” or “I want the Richmond model, but with the Fairfax bedrooms.” Builders like Ms. Just For You aren’t speculating: They have a contract in hand before they build a house. Their businesses are eligible for SBA financing, 7(a) and 504.
  • On Spec. Then there are builders like Mr. On Spec. They buy a bunch of lots or a large acreage, subdivide it, put in streets and utilities, and build a few houses. They don’t have customers in hand. They’re speculating that someone, sometime will buy a house. And because they’re speculating, they’re not eligible for SBA financing – 504 or 7(a).  They are eligible under the 7(a) Builders CAPLines program but very few lenders participate.

Important: It is the “business” in which a builder is engaged that determines eligibility. Maybe they’re not applying for a loan to finance home building. Maybe they want to finance a building for their own use. The use of funds is not the issue. A business that builds homes for future sale is a speculative business and therefore it is an ineligible business, no matter the project. They don’t get an SBA loan unless it’s a CAPLine, and that is rare. (SOP 50 10 5 (K) Subpart B. Chapter 2, III. 3. A.3 b. pg. 105, Subpart C., Chapter 2, III.A. 3. b. pg. 288)

Running out of patience. I figured that would settle that. But Patience kept going.

Patience. Okay, Richard. I get it. But my home builder client tells me he does both. He builds custom homes and he develops subdivisions. So now what?

Me. In this case, the SOP has it covered: “Businesses primarily engaged in subdividing real property into lots and developing it for resale on its own account are not eligible…”  (SOP 50 10 5 (K) Subpart B. Chapter 2, III. 3. A.3 b. pg. 105, Subpart C., Chapter 2, III.A. 3. b.g. 288)

The test is the primary source of revenue. In practice, if more than 50% of revenue is derived from the ineligible activity, the business is ineligible. And just to be clear, the ineligible business cannot obtain SBA financing even for a use of funds that might be eligible.

Have patience! It’ll all work out.

Richard Jeffrey
Senior Associate, CDC/504 Programs