The U.S. Small Business Administration ("SBA") requires certain limitations to be placed on the occupancy of commercial real estate under the following circumstances: (1) when loan proceeds are being used to purchase a commercial building or condominium unit; (2) when loan proceeds are being used to construct a building for Borrower's use, no matter whether such construction is on land owned or leased by Borrower; or (3) when loan proceeds are being used to renovate an existing building or condominium unit for Borrower's use, regardless of whether such building/condominium unit is owned or leased by Borrower.  Therefore, if any one of these three situations exist, the SBA will place certain requirements on the occupancy of such building or condominium unit.

                If loan proceeds are being used for either a purchase or renovation to an existing building or condominium unit, then there are two different SBA occupancy conditions that may apply. The applicable condition will depend upon who the Borrower is.  If Borrower is an operating company, then: (i) it must occupy at least 51 % of the Rentable Property (as defined hereinafter); (ii) it must occupy 100% of the renovated Rentable Property for the term of the loan; and (iii) it is not allowed to renovate any of the Rentable Property with loan proceeds that is to be leased to outside parties.   Rentable Property, according to 13 CFR 120.10, is "the total square footage of all buildings or facilities used for business operations."

                If the Borrower is an eligible passive company ("EPC"), as allowed by the SBA under its Eligible Passive Company Rule (see SOP 50 10 5(B) pages 116 - 118), then the EPC must lease 100% of the Rentable Property to the operating company for the term of the loan and the operating company may then sublease up to 49% of the Rentable Property to third parties.  As in the situation above where operating company is sole Borrower, no loan proceeds may be used to renovate any Rentable Property that is leased to third parties.

                If loan proceeds will be used for the construction of a new building for Borrower's use, two different occupancy conditions apply which are dependent upon who the Borrower is.  If the operating company is the sole Borrower, then the Borrower must immediately occupy at least 60% of the Rentable Property and can only lease on a long term basis up to 20% of the Rentable Property to outside parties.  Additionally, Borrower must plan to occupy a portion of the remaining Rentable Property not immediately occupied or leased long term to outside parties within three years from the loan closing.  Lastly, Borrower must plan to occupy all of the Rentable Property not leased long term within ten years from the loan closing. If the Borrower on the construction loan is an EPC, then a similar occupancy conditions apply, with the only addition being that the EPC must lease 100% of the Rentable Property to the operating company, which is then subject to all of the same requirements discussed above.

                By closely adhering to the SBA's occupancy requirements, Lenders can avoid pitfalls that may lend to repairs or denials of the SBA Guaranty. For more information on occupancy conditions or other SBA eligibility matters, contact Janet at jdery@starfieldsmith.com or 215-542-7070.