SBA Financing for Buildings Not Owned by the Small Business

Many small businesses own the real estate where they conduct their operations; however, they are often advised not to own the real estate in the same entity that operates the business.  Their CPA cites tax advantages, their attorney makes this recommendation due to liability issues, or they simply need to bring in other investors for the capital required to make the down payment. Since it is the small business operating company that is eligible for SBA financing, how can another company take advantage of SBA terms and lease the property to the small business?

SBA has come up with a solution for this commonly faced dilemma. For the company owning the real estate for the benefit of the small business, which is eligible for SBA financing, SBA makes an exception. SBA allows this transaction for companies which meet the requirements of an “Eligible Passive Company” or “EPC”. Typically the ownership of the EPC mirrors the ownership of the small business operating company; however, in some instances the capital requirements of the two different companies may dictate disproportionate ownership percentages or additional members in one company but not the other.

The SBA has two caveats to this financing exception; the EPC and its primary owners will need to accept liability on the SBA loan along with the small business operating company and its primary owners. The SBA also stipulates the rental payments from the small business operating company to the EPC while the SBA loan is outstanding.  Essentially, the rental payments should not exceed the cost of the SBA loan payment + property taxes + property insurance + property maintenance. For closely-held EPCs that were established to save taxes, shield liability, or raise equity, these requirements are considered reasonable, and they do not hinder the small business operations.

In summary, despite non-operating companies being generally ineligible for SBA financing, there is an exception for related parties. The small business and its related parties will still be able to take advantage of lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank loans for owner-user real estate financing.  SBA real estate financing may be used for acquisition, new construction, remodeling and expansion, or refinancing and debt consolidation.

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About Bruce Hurta

Bruce Hurta has extensive experience in Small Business Lending. He has served in a number of commercial lending and banking capacities in his career including, President of a Houston-area community bank for 6 years, managed Independence Funding Company, a non-bank start-up in 1994, where he developed his SBA lending expertise. Bruce spent 4 years in Finance as a bank examiner for the Texas Banking Department, 7 years in executive management at two community banks, and 14 years as SBA Lender. He is active in the commercial realtor and business brokerage communities, along with various business and industry organizations. Bruce Hurta is Vice President - Business Development in Houston, TX for Fidelity Bank SBA Lending nationwide. Fidelity Bank offers SBA 7(a) loans, SBA 504 loans, and USDA loans for small businesses to purchase or construct new buildings for their small business operations, to acquire a business, to expand a business or to buy out a business partner.
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