Article by Roger Schlueter, MBA
The SBA 504 Loan Program will let you lease out part of the facility that you are financing. You are suppose to be a Owner Occupied facility and that means that the business occupies the space and you cannot rent out the facility as an Investment Property. You can lease out part of the facility. The rule is different for a New Facility and an Existing Facility.
New Facility – You can lease out 40% of the square feet of the building but you cannot use Project Proceeds to Finish Out the rented space, you can only Finish Out space you are using in your business. The rules say that you can lease out long term 20% and then another 20% for up to three years with all space being used by your company within 10 years. THERE ARE NO RENT POLICE AND AFTER THE PROJECT CLOSES, NO ONE IS GOING TO FOLLOW UP ON THESE POINTS AND THERE IS NOT MEANS OF RETRIBUTION IF YOU DO NOT ABSOLUTELY FOLLOW THE RULES.
Existing Facility – You can lease out 49% of the square feet of the building but again, you cannot use Project Proceeds to Finish Out Rented Space. Again there are no rent police but the new SOP does not say you have to occupy all the space in the future like the New Facility does.
The Borrower may take up to one year after closing to meet the Requirements listed above for reasons like the building has an existing lease that is not up for several months.
Residential Space can be part of the project (up to 49%) but the residential space must be an essential part of the business. If renting residential space to a third party the leased space must meet the Leased Space Requirements for New and Existing Facilities.
Change of Ownership Projects can be financed with the SBA 504 Loan for Long Term Fixed Assets. The Project must meet the Community Development or Public Policy Goals and the Jobs must be Shown to be Retained because of the Change of Ownership.
The Borrower can use Passive Ownership or what SBA calls an EPC (Eligible Passive Company) to own the property for Tax Purposes and lease back to the Operating Company. This is usually accomplished through a LLC owning the building and leasing it to the Operating Company. See my Blog covering the Eligible Passive Company Rule as it applies to SBA 504 and Guaranteed Loans.
For Contact information please visit my Webpage at www.schlueterfinancial.com