How much of a building must you occupy under a 504 loan?
Short answer
You must occupy at least 51% of the Rentable Property in an existing building and 60% in new construction. You may lease out the rest within limits (13 CFR § 120.131; SOP 50 10 8.1, Sec. A, Ch. 3, Para. C, p. 54).
You must occupy at least 51% of an existing building or 60% of new construction. The rule is the same for 504 and 7(a) loans (13 CFR § 120.131).
Existing buildings
You must occupy at least 51% of the Rentable Property. You may lease up to 49% to a third party.
New construction
You must occupy at least 60% of the Rentable Property. You may permanently lease up to 20%. You may temporarily lease the last 20% if you plan to use some within 3 years and all within 10 years. Source: SOP 50 10 8.1, Sec. A, Ch. 3, Para. C.1 (p. 54).
How space is measured
Rentable Property is the total square footage of all buildings used for business operations, including common areas. It excludes stairways, elevators and mechanical areas. Exterior space you actively use in operations can count, such as an outdoor storage yard. Parking cannot.
Rules for tenant space
- Loan proceeds cannot improve or renovate space you lease out (Para. C.1; 13 CFR § 120.871).
- You cannot knowingly lease to a business engaged in activity illegal under federal, state or local law.
- Residential and commercial tenants are treated the same.
Timing
You may have up to 1 year after closing to comply. A Certified Development Company (CDC) must not submit a 504 closing package if you will not be occupying and operating at funding. SBA's Sacramento center can approve an exception in advance (Para. C.1).
An Eligible Passive Company must lease 100% of the property to its Operating Company, which then meets these tests.
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