SBA rules · SOP 50 10 8.1

Can an SBA loan finance rental property or investment real estate?

SBA loans cannot finance passive real estate investments or rental properties such as apartment buildings, but they can finance commercial property if an eligible small business occupies the required percentage and leases only the remainder.

Quoted from SBA SOP 50 10 8.1Every quote checked word for word

In detail

Passive real estate and rental properties: Businesses primarily engaged in owning or purchasing real estate and leasing it for any purpose, landlords, apartment buildings, and mobile home parks are ineligible passive businesses. SBA loan proceeds may not be used for property acquired and held primarily for future development, sale, lease, or investment.
Leasing space in an owner-occupied building: An eligible small business may finance an existing commercial building if it occupies at least 51% of the rentable property and leases up to 49% to third parties. For new construction, the business must occupy at least 60% of the rentable property, may permanently lease up to 20%, and may temporarily lease an additional 20%.
Prohibition on improvements to tenant space: A borrower may not use loan proceeds to improve or renovate any rentable property that is or will be leased or subleased to a third party.
Eligible Passive Companies (EPCs): An EPC is allowed solely to hold and lease 100% of the property to an eligible Operating Company (OC) for conducting the OC's business; the OC may then sublease excess space within the standard 51% or 60% occupancy limits.
Transient lodging and residential exceptions: Short-term lodging businesses such as hotels, motels, and RV parks are eligible if more than 50% of revenue comes from transients staying 30 days or less. Essential residential space for an on-site manager or owner may be included in the financing if it does not exceed 49% of the property.

The source

What the SOP says

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

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > Passive Businesses 13 CFR § 120.110(c): (lines 406-418)✓ Verified

“Apartment buildings and mobile home parks are not eligible.

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > Note (lines 423-431)✓ Verified

“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).

SOP 50 10 8.1, Chapter 3: Uses of Proceeds > 13 CFR § 120.130 (lines 803-817)✓ Verified

“For an existing building, the Applicant must occupy 51% of the Rentable Property and may lease to a third party up to 49%; or

SOP 50 10 8.1, Chapter 3: Uses of Proceeds > Occupancy and Leasing Requirements (lines 820-826)✓ Verified

“The Borrower may not use loan proceeds to improve or renovate any of the Rentable Property to be subleased to a third party.

SOP 50 10 8.1, Chapter 3: Uses of Proceeds > When the real estate is owned by an EPC: (lines 834-836)✓ Verified

“The Eligible Passive Company (EPC) Rule is an exception to SBA regulations that prohibit financing assets that are held for their passive income.

SOP 50 10 8.1, Chapter 2: Special Transaction Structures > Eligible Passive Companies (lines 645-649)✓ Verified

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