Ask the Experts : 504 Q & A

504 Q&A

Q – Must a small business meet the SBA 504 loan occupancy requirements immediately?

A - Circumstances may justify allowing the business a period of time after closing of the SBA loan to comply with the above occupancy requirements. For example, a pre-existing lease may have a few more months to run. The SBA may judge what a reasonable time is for the small business to meet the occupancy requirements given the circumstances of the business and real estate conditions in the community. In no case may the small business have more than one year to meet occupancy requirements. In cases where this exception applies, the borrower must provide the SBA, at time of application, a copy of all pre-existing leases, which must show the applicants ability to comply with the occupancy requirements within one year of SBA approval.

Note: for new construction, the borrower must meet occupancy requirements immediately.

Q – Can the borrower extend an existing lease to take advantage of rental income for a 12-month period prior to occupying the required space?

A – No, the borrower cannot extend a lease if the company does not meet the 504 loan occupancy requirements (51% of the useable s.f. of the building). That 12-month time frame is only provided to deal with the expiration of existing leases.

Example 1:

A potential customer wants to buy an existing building that the company presently leases.

1. The borrower presently occupies 45% of the useable s.f.

2. A tenant or multiple tenants occupy the remaining 55% of the useable s.f.

3. The one or all of the tenant leases expires within the next 12 months.

4. The borrower wants to renew the tenant lease(s) for another 6 months after purchasing the building.

Q – Is this project eligible for SBA 504 financing?

A – Yes/no. As long as one or more of the existing leases are not renewed and the borrower plans to occupy the additional leased space to meet the minimum occupancy requirement of 51%, then the project would be eligible for SBA financing. Under this scenario, the borrower cannot extend any leases that prohibit the company from meeting the 51% occupancy requirement as soon as the space becomes available. If the lease(s) are renewed to take advantage of rental income and the borrower does not occupy the minimum space at the earliest time possible, the deal is ineligible for SBA assistance.

Example 2:

A potential customer wants to buy an existing building that the company presently leases.

1. The borrower presently occupies 55% of the useable s.f.

2. A tenant or multiple tenants occupy the remaining 45% of the useable s.f.

3. The one or all of the tenant leases expires within the next 12 months.

4. The borrower wants to renew the tenant lease(s) for another 6 months after purchasing the building.

Q – Is this project eligible for SBA 504 financing?

A – Yes. Because the borrower is meeting the minimum occupancy requirement at the time of application (51%), the borrower can extend the lease(s) to whatever time frame meets the business expansion plans. Those leases can be extended on a short-term or long-term basis and the extensions will not affect the eligibility of the borrower to obtaining SBA 504 loan assistance. However, please note that rental income is generally not considered when determining adequate repayment ability for the loan.

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