Can a real estate holding company get an SBA loan?

“The Eligible Passive Company (EPC) Rule is an exception to SBA regulations that prohibit financing assets that are held for their passive income. (13 CFR § 120.130(d)) Because the EPC rule is an exception, the EPC and the OC must comply with all of the conditions in 13 CFR § 120.111 and each condition is interpreted strictly.

“An Eligible Passive Company (EPC) must use loan proceeds only to acquire or lease, and/or improve or renovate, real or personal property (including eligible refinancing), that it leases to one or more Operating Companies (OCs) for conducting the OC's business, or to finance a change of ownership between the existing owners of the EPC.

“Businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds are not eligible, except Eligible Passive Companies under 13 CFR § 120.111.

“Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible.

“The EPC must lease the project property directly to the OC(s);

“The lease must have a term, including options to renew exercisable solely by the OC(s), at least equal to the term of the loan;

“The rent or lease payments cannot exceed the amount necessary to make the loan payment to the Lender and an additional amount to cover the EPC’s direct expenses of holding the property, such as routine maintenance, utility expenses, insurance, and property taxes.

“An EPC (excluding a trust) may not engage in any business activity other than leasing the property to the OC(s).

“The OC(s) must be a guarantor or a Co-Borrower on the loan.

“Each holder of an ownership interest constituting at least 20% of either the EPC or the OC(s) must guarantee the loan (if the holder is a trust, then the Trustee shall execute the guarantee on behalf of the trust).

“Investments in real or personal property acquired and held primarily for future development, sale, lease, or investment (except for a loan to an Eligible Passive Company or to a small contractor under the Builders CAPLine program).

“The EPC will use the 504 loan proceeds to acquire or lease, and/or improve or renovate real or personal property (including eligible refinancing) that it leases 100% to the OC;