How can a small business qualify for SBA financing for buildings they technically don’t own?

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 for buildings, 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 financing for real estate policies also stipulate 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.