Who guarantees an SBA loan when an affiliate owns the building?

Each holder of at least 20% of either company must guarantee, and the operating company must be a guarantor or co-borrower. SBA calls the building owner an Eligible Passive Company (EPC) and the tenant an Operating Company (OC). The rules are in 13 CFR § 120.111(a) and SOP 50 10 8.1, Sec. A, Ch. 2, Para. A.1:

• The OC. It must be a guarantor or co-borrower. It must be a co-borrower if it receives proceeds or if proceeds buy assets for its use.
• Trust owners. If a holder at that level is a trust, the trustee signs the guaranty for it.
• Spouses. A spouse with a smaller stake in either company guarantees in full when both spouses and minor children together hold 20% or more.
• Non-owner spouses. They sign the appropriate collateral documents. Any guaranty secured by jointly held collateral is limited to their interest.
• Others. SBA or a delegated lender may require more guaranties for credit or other reasons.

A person who signs the note as a borrower in an individual capacity does not also sign a guaranty.

Collateral from the structure

The EPC must furnish an assignment of all rents paid under the lease as collateralcollateralProperty a lender can take and sell if a loan is not repaid. . The lease must be written, subordinate to SBA's lien and run at least as long as the loan (13 CFR § 120.111(a)).

Structures that cannot use an EPC

employee stock ownership plan (ESOP) and 401(k) plan structures cannot use an EPC and OC. The regulation requires guaranties from each holder of 20%, and those plans cannot give them (Sec. A, Ch. 2, Paras. B and D).