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504 Q & A

Nov 2006

Q - Can the SBA 504 loan program be utilized by a small business if the business is not going to occupy 100% of the space?

A - Yes. If the SBA business loan involves the acquisition, renovation, or reconstruction of an existing building, the Borrower may lease up to 49 percent of the Project Property long term.

If the Project is for new construction, the Borrower may lease long term up to 20 percent of the Rentable Property in the Project to one or more tenants if the Borrower immediately occupies at least 60 percent of the building(s), and plans to occupy within three years some of the remaining space not immediately occupied and not leased long term, and plans to occupy all of the remaining space not leased long term within ten years. Note - that within 10 years, the small business must occupy 80 percent of the space and can only permanently lease 20 percent of the space.

Q - If a portion of the building is going to be leased, can 504 project proceeds be utilized to remodel or convert rental space?

A - No, except remodeling or conversion expenses required for space occupied by the small business which will incidentally improve the rental space (such as replacing a roof or roof repair, a heating system for a whole building, windows and exterior facade work, and so on) are acceptable if the benefit to the rental space is reasonable and can not be avoided.

The costs of interior finishing of space (e.g. carpeting, painting, light fixtures, and so on) to be leased out to another business are not eligible Project costs. Third-party loan proceeds used to renovate the leased space can not count towards the 504 first mortgage requirement or the Borrower's contribution.

Q - Must the small business meet occupancy requirements immediately?

A - Circumstances may justify allowing the SBC 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. SBA may judge what is a reasonable time 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 1 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 1 year of SBA approval.

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

Q - Can Rental Income be utilized to show repayment?

A - The documented determination of repayment, that is required as part of every loan's analysis, must be based on the existing and/or projected cash flow of the primary business activity, without the benefit of any rental income.

When the anticipated cash flow from the applicant's primary business activity is insufficient to demonstrate repayment of the proposed loan and other debt obligations, the analyst may add the anticipated cash flow of the projected rental income to make a case for repayment ability. However, the validity of the projected rental income must be independently substantiated. It is insufficient to justify the receipt of rental income just because the space is available.

Examples of items that can be reviewed and commented on to substantiate rental income include, but are not limited to: The longevity of existing rental agreements that will transfer with the purchase of an existing building; or an appropriate Real Estate Association Report on the need and desirability for the type of space that the applicant will be able to offer for lease.