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504 Q&A: Occupancy Requirements for Debenture Funding

Mar 2015

Q: If a borrower wants their Small Business Administration (SBA) 504 loan to be submitted for debenture funding consideration but has not yet moved into their building, is that going to be a problem?

A: In short, the answer is “Yes,” but the problem can be overcome.

The SBA 504 Loan Program not only helps economic growth by creating jobs, but it also serves the purpose of helping small business owners purchase, lease or build buildings that they will eventually occupy. This is also a requirement that is spelled out very specifically in each loan authorization as well as in each borrower and operating company certification that is signed as part of the closing package.

In the certification, one of the following options must be checked:

(a) Occupy, at all times during the term of the 504 loan, at least 51% of the total rentable property and 100% of the renovated rentable property. The borrower will not use the 504 loan proceeds to improve or renovate any of the property leased to third parties; OR

(b) Comply with the following provisions: (1) the borrower must lease 100% of the rentable property to the operating company; (2) the operating company may sublease up to 49% of the total rentable property; and (3) the borrower will not use the 504 loan proceeds to improve or renovate any of the rentable property in the project to be subleased; OR

(c) Comply with the following provisions: (1) immediately occupy at least 60% of the total rentable property; (2) continue to occupy at least 60% of the rentable property for the term of the Loan; (3) lease long term no more than 20% of the total rentable property to one or more tenants; (4) plan to occupy within three years some of the remaining rentable property not immediately occupied or leased long term; and (5) plan to occupy within 10 years all of the rentable property not leased long term; OR

(d) Comply with the following provisions: (1) The borrower must lease 100% of the rentable property to the operating company; (2) The operating company must immediately occupy at least 60% of the rentable property; (3) The operating company will lease long term no more than 20% of the rentable property to one or more tenants; (4) The operating company must plan to occupy within three years some of the remaining rentable property not immediately occupied or leased long term; and (5) The operating company must plan to occupy within 10 years all of the rentable property not leased long term.

(e) Other: please attach a copy of the SBA's written consent to an extension of time to comply with the alternative marked above.

Keep in mind that if option (e) above is chosen, and additional time is necessary, it must be obtained in writing from the SBA in advance and should be specific in nature. The SBA's Standard Operating Procedure (SOP) states circumstances may justify allowing 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. In no case may the small business have more than one year to meet occupancy requirements. If a borrower meets this scenario, the Certified Development Company (CDC) will request and must obtain necessary information to submit a request to the SBA for extension.

Documentation that is required to evidence occupancy according to SOP is either a Certificate of Occupancy and/or a Certificate of Completion and these are both items on the 504 closing checklist for file review by the SBA District Counsel. The CDC will request this from the borrower prior to submission of the loan to the SBA for debenture funding.

If you have a question you'd like our SBA 504 loan experts to answer, email us atinfo@ffcfc.comor call 850.681.3601 or toll-free at 888.320.5504.