What are the SBA occupancy rules for new construction?
Short answer
You must occupy at least 60% of the Rentable Property. Up to 20% may be leased permanently. The last 20% may be leased temporarily if you plan to use some within 3 years and all within 10. Source: 13 CFR § 120.131(a).
New construction requires you to occupy at least 60% of the Rentable Property. 13 CFR § 120.131(a) and SOP 50 10 8.1, Section A, Ch. 3, Para. C, set the split for 7(a) and 504 loans.
The three slices
- At least 60%: occupied by your business.
- Up to 20%: permanently leased to third parties.
- The remaining 20%: leased temporarily, with the intention of using some of it within 3 years and all of it within 10 years.
For example, in a 10,000 square foot building, you occupy at least 6,000 square feet. You may permanently lease up to 2,000. The last 2,000 can be leased temporarily.
When an EPC owns the building
The Eligible Passive Company (EPC) must lease 100% of the Rentable Property to the operating company. The operating company then meets the same 60% test and can sublease within the same limits.
Rules for the leased space
- Proceeds cannot improve or renovate space to be subleased to a third party. On a 504, those improvements cannot secure the Third Party Loan.
- The restrictions apply to commercial and residential tenants alike.
- Space cannot go to a business the borrower knows is engaged in illegal activity, such as a marijuana dispensary.
13 CFR § 120.870(b) states the same 60% and 20% limits for 504 projects.
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