Eligible Passive Companies and SBA Loans

According to the SBA, an eligible passive company (EPC) is a firm that leases real estate or other property to an operating company (OC) for its' use. In general, the SBA does not approve loans for passive companies that own real estate or other assets, however, eligible passive companies are an exception to that rule, provided that they use the proceeds of an SBA loan to "acquire or lease, and/or improve or renovate, real or personal property (including eligible refinancing)." EPC rules typically apply to all forms of SBA loans, including SBA 7(a) loans, SBA Express Loans, and SBA 504 loans, as well as loans issued under the EIDL and PPP loan programs.

Applications of the EPC Rules to the SBA Loans

In most situations, the operating company and the eligible passive company must be a co-borrower or guarantor of the SBA loan. Further, the active operating company can be allocated part of the loan proceeds, while the eligible passive company can be allocated the rest. In many cases, the passive firm will purchase and improve property that it can then lease to the active firm. The EPC and OC can also purchase other types of assets, such as company stock (for instance, to buy out a partner), or IP, such as trademarks or copyrights, to expand their business operations.

Other Eligible Passive Company Requirements for SBA Borrowers

In addition to the above requirements for an SBA loan to fund an EPC, there are a few other requirements that SBA borrowers should generally keep in mind. These include:

• Company Size and Eligibility: Both the EPC and OC (operating company) must adhere to SBA size and eligibility standards (i.e. both must not have more than a certain amount of employees and a certain amount of revenue, and must not be engaged in prohibited business activities).
• Borrower Guarantee: All borrowers who have a 20% or more stake in either the EPC or the OC need to guarantee the loan. The SBA or the lender may also require additional individuals or entities with a less than 20% interest in the EPC or OC to guarantee the loan, should it be deemed that a greater amount of "security" be required to close the deal to the SBA's and the lender's satisfaction.
• Trust Rules: If EPC assets are held in a trust, the SBA will generally require specific security guarantees, including requiring that the trustee can actively manage assets, borrowing funds, and is legally allowed to lease the property to the OC. The trustee also needs to be able to provide a full and complete list of all trustors and donors to the trust (i.e the trust cannot be used to conceal information from the SBA or the lender).
• Leasing Rules: In general, the lease between the operating company and the EPC needs to be clear, defined in writing, and also has to be subordinate to all SBA loans or security interests. Leasing or rental payments also may not be more than necessary to make regular payments to the SBA lender (plus EPC costs such as property management or maintenance).
• Leasing Duration: The lease between the OC and EPC must be at least as long, if not longer, than the actual duration of the SBA loan.
• Leasing Amount: In most cases, the EPC has to lease 100% of the property to the operating company, those some subleasing is allowed.