Can Title to the Real Estate be Held in the Name of an Entity Other than the Small Business Applicant?

The 504 Loan Program DOES allow a 'passive' small entity or trust (i.e., an entity or trust that does not engage in regular and continuous business activity) to be the borrower and own the project assets included in a loan application. In fact, this situation is typical for most of the loans processed by Colorado Lending Source.

Nevertheless, the 504 Loan Program is not landlord-friendly, so only passive entities who lease real or personal property to an Operating Company (one or more) for use in that Operating Company's business may participate.

Specifically;

- The Eligible Passive Concern (= EPC) must use loan proceeds to acquire and / or improve and / or renovate real or personal property that it then leases to an Operating Company.

- Any ownership structure or legal form (including individual or married couple owners) may qualify as an Eligible Passive Concern.

- The EPC (with the exception of a trust) and the Operating Company each must be small under appropriate size standard.

- The lease between the EPC and the Operating Company, including options to renew exercisable solely by the Operating Company, must have a term at least equal to the term of the 504 Program Loan (i.e., 20 or 10 years).

- The Operating Company must be a guarantor or co-borrower with the EPC.

- Each holder of an ownership interest constituting at least 20% of the EPC or the Operating Company must personally guaranty the loan.

- A trustee shall execute the guarantee on behalf of a trust.

Eligibility Considerations

To be eligible for SBA 504 financing, a business must satisfy four general requirements:

It must be organized for profit;
It must be located in the US;
It must be "small"; and,
It must be able to demonstrate a need for the desired credit

With regard to the latter point, if funds are otherwise available to the business "on reasonable terms and conditions" from alternative, nonfederal sources, including personal resources, without a 504 Loan, then the business may not be an eligible business.

For example, if the total personal liquid assets of anyone who owns 20% or more of the business / businesses are "excessive" then these owners will have to inject more of their own resources into the project and reduce the 504 portion of the financing package proportionately. Liquid assets include: cash or cash equivalent; savings accounts, CD's, stocks, bonds; and, the cash surrender value of life insurance policies. IRAs, real estate and other personal property are NOT considered liquid assets.

The "Liquidity Test" used by the SBA to determine whether or not the total of the liquid assets are “excessive” or not, varies with the size of the total financing package associated with the project. When the total financing package is:

$250,000 or less, each 20% owner must inject any personal liquid assets which are in excess of two times the total financing package or $100,000, whichever is greater.
Between $250,001 and $500,000, each 20% owner must inject any personal liquid assets which are in excess of one and one-half times the total financing package or $500,000, whichever is greater.
Exceeds $500,000, each 20% owner must inject any personal liquid assets which are in excess of one times the total financing package or $750,000, whichever is greater.

The simple logic behind this liquidity test calculation is that if the major owners of a small business has access to a lot of cash that is just sitting around, that business really can't demonstrate a legitimate "need" to access the 504 Loan Program.

Ineligible Businesses

The following is a list of those small businesses generally considered ineligible for assistance under the SBA 504 loan program.

Nonprofit organizations;
Financial businesses primarily engaged in lending (i.e., banks, finance companies, factors, etc.);
Passive businesses owned by developers and landlords that do not actively use or occupy the asset being purchased (i.e. apartment complexes, storage locker businesses, etc.);
Life insurance companies;
Businesses located in a foreign country;
Pyramid sales distribution plans;
Businesses deriving more than 1/3 of gross annual revenue from legal gambling;
Businesses engaged in any illegal activity;
Private clubs and businesses which limit the number of members for reasons other than capacity;
Government-owned entities (except Native American owned entities);
Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs;
Consumer and marketing cooperatives (producer cooperatives are eligible).
Loan packagers earning more than 1/3 of gross annual revenues from packaging SBA loans;
Businesses where an Associate or Principal is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude;
Businesses in which a private sector lender or Colorado Lending Source (or any certified development company) or any of its associates, owns an equity interest;
Businesses which present live performances of a prurient sexual nature, or; derive more than de minimis (2%) gross revenues from the sale of products or services of a prurient sexual nature;
Businesses that have previously defaulted on a Federal loan or Federally assisted financing;
Businesses primarily engaged in political or lobbying activities; and,
Speculative businesses, such as oil wildcatting, etc.