# 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.

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Last checked: 2026-11-08

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.

## Sources

- [13 CFR § 120.111](https://www.ecfr.gov/current/title-13/section-120.111)
- [SOP 50 10 8.1, Sec. A, Ch. 2, Para. A (p. 41)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, Appendix 3, Eligible Passive Company (about p. 299)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)