SBA SOP 50 10 8.1, A.Ch3.C — Occupancy and Leasing Requirements

C. Occupancy and Leasing Requirements 1. Occupancy 13 CFR § 120.131 Amount of Rentable Property (based on the total project) that can be leased: a. When loan proceeds are used to purchase or improve real estate, or when debt secured by real estate is refinanced with loan proceeds:

i. For an existing building, the Applicant must occupy 51% of the Rentable Property and may lease to a third party up to 49%; or

ii. For new construction, the Applicant must occupy 60% of the Rentable Property, may permanently lease to a third party up to 20% and temporarily lease an additional 20% with the intention of using some of the additional 20% within 3 years and all of it within 10 years. b. When the real estate is owned by an EPC: i. The EPC must lease 100% of the Rentable Property to an eligible OC(s). ii. For an existing building, the OC(s) must occupy 51% of the Rentable Property and may sublease up to 49%; or

iii. For new construction, the OC(s) must occupy 60% of the Rentable Property, may permanently sublease to a third party up to 20% and temporarily sublease an additional 20% with the intention of using some of the additional 20% within 3 years and all of it within 10 years. c. “Rentable Property” is the total square footage of all buildings or facilities used for business operations (13 CFR § 120.10) excluding stairways, elevators, and mechanical areas and including common areas. Rentable Property may also include exterior space (except parking areas) that is actively used in Borrower’s business operations. Examples of exterior space that is actively used in Borrower’s business operations include: outdoor storage yards for general contractors, trucking companies, and moving and storage companies; or boat slips and docks for marinas. To determine the occupancy percentage allocated to the Applicant or OC(s), the SBA Lender may include the square footage of all common areas. In an existing building zoned for both commercial and residential use, subject to the space occupancy requirements set forth above, the business owner may either occupy or rent to a third party the space zoned for residential use. However, any residential property occupied by the business owner will only be considered to be occupied by the business if it meets the requirements of Subparagraph h below as well as zoning requirements. d. Circumstances may justify allowing the Applicant a period of time after closing of the SBA Loan to comply with the above occupancy requirements such as when a pre-existing lease may have a few more months to run. In no case may the small business have more than 1 year to meet occupancy requirements. CDCs must not submit a 504 closing package if the Borrower will not be occupying and operating in the required amount of Project property after closing and funding. If the Borrower will not be able to meet the occupancy requirements, the CDC must submit in advance and in writing to SLPC a request to extend the period of time necessary for the Borrower to meet occupancy requirements, along with an explanation and any supporting documentation, for SLPC approval. The underlying premise is that an SBA 504 loan is permanent, take out financing. A CDC must not submit a 504 closing package where the Borrower is not occupying and operating upon funding, unless facts to the contrary have been submitted to and approved by the SLPC in advance. If SLPC approves such request, once the Borrower is occupying the property in accordance with the Authorization, the CDC must submit a 327 action certifying the Borrower’s compliance within the approved timeframe. e. The restrictions above apply regardless of whether the Rentable Property is leased to a commercial or residential tenant. f. The Borrower may not use loan proceeds to improve or renovate any of the Rentable Property to be subleased to a third party. For 504 loans, such improvements may not secure the Third Party Loan. g. During the life of the loan, the real estate pledged as collateral for the loan, or where the Borrower or Operating Company conducts its business operations, may not be leased to or occupied by any business that the Borrower or Operating Company knows is engaged in any activity that is illegal under Federal, state or local law or any activity that can reasonably be determined to support or facilitate any activity that is illegal under Federal, state or local law (such as a marijuana dispensary). If a Borrower or Operating Company does lease space to such a business, for 7(a) loans, the Lender must notify SBA counsel as soon as the Lender becomes aware of the lease and advise of the action(s) the Lender intends to take and, for 504 loans, the CDC must notify SBA counsel as soon as the CDC becomes aware of the lease to determine what action(s) should be taken. h. Residential Space as Part of the Business If the nature of the business requires a resident owner or manager, loan proceeds may be used for the purchase of an existing building(s) or construction of a new building(s) that includes residential space essential to the business. The square footage of the residential space must be appropriate to the needs of the business and may not exceed 49% of the total property. For example, a livestock operation or facility may require that someone be on premises at all times to care for the livestock. In this case, the residential property would be considered to be occupied by the business. 2. Responsibilities When the Borrower is Leasing Space a. When the Borrower is operating in leased space and $500,000 or 30% of loan proceeds (whichever is less) will be used for leasehold improvements or when $500,000 or 30% of the proposed collateral (whichever is less) consists of leasehold improvements, fixtures, machinery, or equipment that is attached to leased real estate: i. The SBA Lender must obtain a copy of the written lease between the Borrower and the landlord. For 7(a) loans, the lease term, including renewal options exercisable only by the Borrower, should equal or exceed the term of the loan. For 504 loans, the lease term must equal or exceed the term of the loan. An assignment of lease and Landlord’s waiver should be obtained. ii. If the SBA Lender is unable to obtain the assignment of lease or landlord’s waiver, for both 7(a) and 504 loans, the lease term, including renewal options exercisable only by the Borrower, must equal or exceed the term of the loan. Additionally, the SBA Lender must document in its file its attempt to obtain the assignment and the landlord’s waiver and the reason(s) for not obtaining them. b. If the loan proceeds will finance improvements on a leasehold interest in land, the underlying ground lease must include, at a minimum, detailed clauses addressing the following: i. Tenant's right to encumber leasehold estate; ii. No modification or cancellation of lease without SBA Lender's or assignee's approval; iii. SBA Lender's or assignee's right to: a) Acquire the leasehold at foreclosure sale or by assignment and right to reassign the leasehold estate (along with right to exercise any options) by SBA Lender or successors; lessor may not unreasonably withhold, condition, or delay the reassignment; b) Sublease; c) Share in hazard insurance proceeds resulting from damage to improvements; d) Share in condemnation proceeds; and e) SBA Lender’s or assignee’s rights upon default of the tenant or termination. c. If the loan proceeds will finance improvements made by the Borrower/tenant on a space that the Borrower is leasing, and if the landlord will reimburse the Borrower for such tenant improvements, the landlord reimbursement must be used to pay down the loan to a point that will not trigger a subsidy recoupment fee, and any remaining funds may be used for business working capital or to decrease the rent payments. Alternatively, if the Lender can document that the landlord reimbursement has been factored into the Lender’s working capital adequacy analysis, the landlord reimbursement may be used for business working capital or to reduce the rent payments. d. For loans collateralized by Indian lands held in trust, if the owner of the land cannot get approval for a lien on the property, the SBA Lender may consider requiring an Assignment of Lease. The Assignment of Lease also has to be approved by the Secretary of the Interior or his/her authorized representative.