What is an Eligible Passive Company?
Short answer
It is a small entity or trust that leases real or personal property to an eligible Operating Company. It is the exception that lets a separate real estate entity borrow. It must meet every condition in 13 CFR § 120.111.
An Eligible Passive Company (EPC) is a small entity or trust that leases property to an Operating Company (OC). It does no regular business of its own. It lets an owner hold a building in a separate company and still use SBA financing. 13 CFR § 120.111 and SOP 50 10 8.1, Sec. A, Ch. 2, Para. A set the rules, and SBA reads each one strictly.
Main conditions
- The OC must be an eligible small business, and the use of proceeds must be eligible as if the OC were borrowing directly.
- The EPC, unless it is a trust, and the OC must each be small.
- The EPC must lease directly to the OC under a written lease subordinate to SBA's lien.
- The lease term, with options the OC alone can exercise, must at least equal the loan term.
- Rent cannot exceed the loan payment plus the EPC's direct costs of holding the property.
- The EPC must furnish an assignment of rents as collateral.
- An EPC other than a trust may do nothing besides lease the property to the OC.
Who signs
The OC must be a guarantor or co-borrower, and a co-borrower if it receives proceeds. Each holder of at least 20% of the EPC or OC must guarantee.
If a condition is missed
SBA may deny liability on a 7(a) guaranty if the loan defaults.
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