FAQs - Equity, Leaseback & Rental

I bought land several years ago that is worth much more now than I originally paid for it. Can I contribute the land to my building construction project as equity? Will it be valued at cost or market value?

Land may be used as the equity injection in the project. The appraised value may be used if the land was acquired more than two years prior to the application date and the appraisal is accompanied by a title report covering the sale history for the past five years. Otherwise, the lower of cost or market value must be used.

The borrower's contribution may include the buildings and site improvements on the contributed land as long as they are used in the project.

I am buying a building at less than market value. Can I use the equity in the property as my 10% equity injection?

No, the project value will be based on the lower of cost or appraised value. However, an exception to this rule is that a "land write-down" on unimproved land DOES qualify as equity.

My accountant told me that there are tax advantages to me if I own the real estate personally and lease it back to my company. Is this practice permissible to the SBA?

Yes, however, anyone who owns 20% or more of either the real estate OR the company will be required to sign a Personal Guaranty for the entire amount of the SBA loan.

An Employee Stock Ownership Plan (ESOP) owns a portion of the stock of the corporation and I own the remainder. I plan to own the real estate personally and lease it to the corporation. Must the ESOP provide a guaranty for the loan?

If the ESOP owns 20% or more of the corporation at the time of application, then a guaranty would be required. If the ESOP cannot provide such a guaranty, then a beneficiary must do so.

The SBA may occasionally waive the requirement for a guaranty from an ESOP if the 504 loan has been made to the operating company. Please contact a SPEDCO loan officer with specific details for a more in-depth ruling.

Is it permissible for two or more owners (such as two doctors each owning his/her own practice) to jointly purchase a building using the SBA 504 loan program and then lease back space to their individual businesses?

While it IS permissible for two (or more) unrelated owners to purchase or construct a building together, then each lease back a portion, borrowers should keep one important fact in mind: in order to qualify, each person who owns 20% or more of either the building OR either of the operating companies must offer a full personal and corporate guaranty on the entire project.

Another possibility would be for the two owners to turn the building into a condominium, with separate legal descriptions. In this way, each person will be asked to guaranty own his/her own portion of the building.

Because I expect my company to continue to grow rapidly, I would like to construct a building larger than what I will need at first. Is it possible for me to rent out some of the space for a few years?

For new construction, the SBA permits rental of up to 40% of the space in the short term; however, by viewing the company's projections, the SBA expects that the borrower's company will occupy 80% of leased space within 10 years of the loan. Only 20% of the total area may be leased out permanently.