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Best Practices: Leasing Part of a Building Acquired with SBA Loan Proceeds

The SBA imposes occupancy requirements when loan proceeds include the purchase of an existing building or for new construction. These requirements are designed to ensure that the borrowing entity’s business is successful and that the loan proceeds benefit the borrower, rather than a third party. Accordingly, lenders must perform an analysis of the percentage of rentable property occupied by the small business concern to ensure compliance.

The regulations governing occupancy may be found in 13 CFR 120.10 and 120.131, and the rules are set forth in SOP 50 10 5(H), Subpart B, Chapter 2, IV. F. The structure of the loan and the use of proceeds determine which occupancy requirements apply. For an existing building, a small business must occupy 51% of the rentable property and may lease up to 49%. For new construction, the borrower must occupy 60% of the rentable property, may permanently lease up to 20% and temporarily lease an additional 20% with the intention of using some of the additional 20% within 3 years and all of it within 10 years. Moreover, the applicant may not use loan proceeds to improve or renovate any rentable property leased to a third party. If the loan is structured as an EPC/OC facility, lenders should note that the above requirements apply. In addition, the EPC must always lease 100% of the rentable property to the OC. In turn, the OC may sublease a portion of the space consistent with the rules stated above. Rentable property is the total square footage of all buildings or facilities used for business operations excluding vertical penetrations (i.e. stairways) and including common areas. Rentable property may also include exterior space (except parking areas) that is actively used in a borrower’s business operations, such as outdoor storage yards for general contractors or boat slips and docks for marinas.

When the nature of the business requires a resident owner or manager, loan proceeds may be used for the purchase of an existing building or construction of a new building that includes residential space, provided such residential space does not exceed 49% of the total property. The residential space must be essential for the business. For instance, a facility which requires that someone be on the premises 24/7 would enable the residential property to be considered part of the business. Because the SBA includes occupancy requirements in certain loans, it is important to distinguish which loans require the Authorization to provide this language, and which specific language is needed. Lenders must perform due diligence and carefully review the factual circumstances in order to comply with the Agency’s rules and regulations. By doing so, Lenders will help to ensure that the SBA guaranty is protected. For more information please contact John Kropf at 216-592-2332, extension 201