SBA SOP 50 10 8, A.Ch2.A — ELIGIBLE PASSIVE COMPANIES
Verbatim text of SBA SOP 50 10 8 section A.Ch2.A (ELIGIBLE PASSIVE COMPANIES), effective 2025-06-01. 3 provision(s) quoted from the SOP PDF. SBA's own document page serves superseded editions, and the SOP is further amended by policy notices — read this with the notices that touch it.
Verbatim regulatory text
Verbatim provisions from SBA SOP 50 10 8, A.Ch2.A — ELIGIBLE PASSIVE COMPANIES — each quote is a verified substring of the regulator-published source snapshot, not retyped. Quoted for reference; this is not legal advice. The operational layer (P&P updates, prompts) lives in the regulation update kits.
SOP 50 10 8 A.Ch2.A
A. ELIGIBLE PASSIVE COMPANIES 13 CFR § 120.111 The Eligible Passive Company (EPC) Rule is an exception to SBA regulations that prohibit financing assets that are held for their passive income. (13 CFR § 120.130(d)) Because the EPC rule is an exception, the EPC and the OC must comply with all of the conditions in 13 CFR § 120.111 and each condition is interpreted strictly. If all conditions are not complied with, in the event of default on a 7(a) loan, SBA may deny liability on the guaranty. In 504, SBA may pursue a CDC Recovery Claim under 13 CFR § 120.938 in the case of fraud, negligence, or misrepresentation by the CDC. An Eligible Passive Company (EPC) must use loan proceeds only to acquire or lease, and/or improve or renovate, real or personal property (including eligible refinancing), that it leases to one or more Operating Companies (OCs) for conducting the OC's business, or to finance a change of ownership between the existing owners of the EPC. An EPC may only use loan proceeds to finance a change of ownership between existing owners of the EPC when the real estate or personal property has been held by the selling owner(s) for at least 36 months. For specific information on change of ownership loans with an EPC/OC structure: • For 7(a), see the eligible uses of proceeds section of each delivery method chapter. Note, change of ownership is not an eligible use of proceeds for the CAPLines and EWCP delivery methods, or for revolving facilities. • For 504, see Section C, Ch. 1, Para. C.13, Change of Ownership for the circumstances under which change of ownership is permitted. Note: See Para. C.13.a.iii. of such Section for important restrictions that apply if using a 504 loan to finance a change of ownership between existing owners of the EPC. With the exception of a change of ownership between existing owners of the EPC, an EPC may not use loan proceeds to acquire a business, acquire stock in a business or any intangible assets of a business, or to refinance debt that was incurred for those purposes. In addition, when the EPC and OC(s) are Co-Borrowers: • A 7(a) loan may include loan proceeds for working capital and/or the purchase of other assets, including intangible assets for the OC’s use; and • A 504 loan may include loan proceeds for the purchase of fixed assets to be owned by the OC(s). An EPC can take any legal form or ownership structure (e.g., corporation, partnership, LLC, sole proprietor, tenancy in common, etc.) A tenancy in common is a form of legal ownership and does not create a new or separate legal entity. There may be several individuals or entities in a tenancy in common, but the tenancy in common is considered one EPC. The loan documents must be signed by all of the members of the tenancy in common. Section A, Ch. 2 Special Transaction Structures Multiple OCs that are separately owned can participate in an EPC/OC structure, however, multiple EPCs in one transaction are not permitted. An EPC may own several unique properties that it leases to the same OC(s); however, in the case of multiple OCs, the same OCs (with the same ownership structure) must jointly occupy each property (i.e., it is not permissible for one OC to occupy one property and a different OC to occupy a different property). 1. Conditions that apply to all EPCs: The OC(s) must be an eligible small business; The proposed use of proceeds must be an eligible use as if the OC(s) were obtaining the financing directly; The EPC (with the exception of a trust) and the OC(s) each must be small under the appropriate size standard of 13 CFR Part 121; The EPC must lease the project property directly to the OC(s); and i. Obtain a fully executed written lease; ii. The lease must be subordinated to the SBA’s mortgage, trust deed lien, or security interest on the property (Note: This is not the same as a Landlord’s Waiver); iii. The lease must have a term, including options to renew exercisable solely by the OC(s), at least equal to the term of the loan; iv. The EPC (as landlord) must furnish as collateral for the loan an assignment of all rents paid under the lease. An assignment of the lease is only required when necessary to perfect the assignment of rents under applicable law, or to enable the SBA Lender to exercise the tenant’s rights upon default; v. The rent or lease payments cannot exceed the amount necessary to make the loan payment to the Lender and an additional amount to cover the EPC’s direct expenses of holding the property, such as routine maintenance, utility expenses, insurance, and property taxes. vi. For 504 loans, loan payments to the SBA, the Third Party Lender, and if applicable, to a lender authorized by SBA to provide the Borrower's contribution, are included in the calculation of “loan payment to the Lender.” Rent or lease payments cannot include amounts for accelerated payments on the Third Party Loan; vii. When calculating repayment ability, the SBA Lender must consider whether the OC’s cash flow will be sufficient to cover the loan payment (for 504 loans, including the loan payment to the Third Party Lender), in addition to the expenses of holding the property including the payment of routine maintenance, property taxes, utility expenses, insurance, and all other ongoing expenses; viii. The OC(s) must lease 100% of the property from the EPC, but it can sublease a portion of the property under the rules governing occupancy requirements with which all SBA Borrowers must comply (see Ch. 3, Para. C, Occupancy and Leasing Requirements of this Section for more Section A, Ch. 2 Special Transaction Structures information); ix. If, in acquiring the property, the EPC becomes the beneficiary or owner of the rights to an existing mineral lease on the property, the EPC must assign its interest in the lease (together with its rights to all rental, mineral, royalty, bonus, or similar lease payments that might accrue by virtue of the existing mineral (oil and gas) lease) to the OC(s); and any such assignment must be subordinated to all Deeds of Trust or Mortgages. In addition, the SBA Lender must take the following actions if applicable: a) If subordination is not possible: i) For 7(a) loans: The 7(a) Lender must obtain a legal opinion to that effect; ii) For 504 loans: CDC Closing Counsel must provide a legal opinion to that effect; b) If the mineral lease has been terminated, the SBA Lender should attempt to have it removed from the Title Policy; c) If the SBA Lender is unable to have the mineral lease removed from the Title Policy: i) For 7(a) loans: (a) The SBA Lender must provide supporting documentation evidencing the proper assignment of the lease to the OC(s) and obtain a title endorsement to protect SBA’s interest in the real property (see, for example, California Land Title Association (CLTA) 100.23 or 100.24). (b) SBA Lenders processing loans under non-delegated procedures must submit a copy of the lease agreement between the EPC and OC(s) with the application for loan guaranty to SBA. SBA Lenders processing loans under delegated authority must keep a copy of the executed lease in their loan file and must submit the lease with any request to SBA to purchase the guaranty. ii) For 504 loans: The CDC Closing Counsel must include language in the Opinion of Counsel indicating that they have examined and relied upon the accuracy of the assignment document and obtain a title endorsement to protect SBA’s interest in the real property (see, for example, California Land Title Association (CLTA) 100.23 or 100.24). An EPC (excluding a trust) may not engage in any business activity other than leasing the property to the OC(s). The EPC may own more than one property provided all the property is leased to the same OC(s). The OC(s) must be a guarantor or a Co-Borrower on the loan.
SOP 50 10 8 A.Ch2.A.i
i. Each holder of an ownership interest constituting at least 20% of either the EPC or the OC(s) must guarantee the loan (if the holder is a trust, then the Section A, Ch. 2 Special Transaction Structures Trustee shall execute the guarantee on behalf of the trust).
SOP 50 10 8 A.Ch2.A.i.ii
ii. Each spouse owning less than 20% of an EPC or OC must personally guarantee the loan in full when the combined ownership interest of both spouses and minor children is 20% or more. iii. For a non-owner spouse, the SBA Lender must require the signature of the spouse on the appropriate collateral documents. The spouse's guaranty secured by jointly held collateral will be limited to the spouse's interest in the collateral. iv. If a person has executed the Note as a Borrower in an individual capacity, that person does not also have to execute a personal guaranty. v. When deemed necessary for credit or other reasons, SBA or, for a loan processed under an SBA Lender’s delegated authority, the SBA Lender, may require other appropriate individuals or entities to provide full or limited guaranties of the loan without regard to the percentage of their ownership interests, if any. vi. The OC(s) must be a Co-Borrower if it receives any proceeds or if proceeds will be used to purchase any assets for the OC(s) use. The amount of any loan received by an EPC applies to the loan limit of both the EPC and the OC. 2. Conditions that apply when the EPC is owned in whole or in part by a trust. The eligibility status of the Trustor will determine trust eligibility. All donors to the trust will be deemed to have Trustor status for eligibility purposes. The Trustee must warrant and certify that the trust will not be revoked or substantially amended for the term of the loan without the prior written consent of SBA. The Trustor must guarantee the loan. i. If an Employee Stock Ownership Plan trust agreement prohibits it from being a guarantor or Co-Borrower, then it cannot use the EPC form of borrowing. ii. Beneficiaries that exercise any control over the actions of the trust also must guarantee the loan. The Trustee shall certify in writing to SBA, or to the SBA Lender processing a loan under its delegated authority, that: i. The Trustee has authority to act; ii. The trust has authority to borrow funds, pledge trust assets, and lease the property to the OC(s); iii. The Trustee has provided accurate, pertinent language from the trust agreement confirming the above; and iv. The Trustee has provided SBA or the SBA Lender processing a loan under Section A, Ch. 2 Special Transaction Structures its delegated authority with a true and complete list of all trustors and donors and will provide an updated list to SBA or the SBA Lender processing a loan under its delegated authority any time the list changes. The trust itself does not have to be small by SBA size standards.
Operationalizing SBA SOP 50 10 8, A.Ch2.A — ELIGIBLE PASSIVE COMPANIES
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