A separate company that owns the real estate or equipment and leases all of it to the operating business, allowed under SBA rules when strict conditions are met.
SBA does not lend to businesses that only hold property for rent, with an exception for the EPC. An EPC may use loan proceeds only to acquire, lease, improve or renovate property that it leases to one or more operating companies, or to finance a change of ownership among its existing owners. Each condition is read strictly, and if one is missed SBA can deny the guaranty on a 7(a) loan.
The operating company must be eligible, and both companies must be small. The EPC must lease the property directly to it, in writing, for 100 percent of the space. The lease must be subordinate to SBA’s lien and run at least as long as the loan, counting renewal options only the operating company controls. The EPC assigns the rents as collateral, and rent may not exceed the loan payment plus direct holding costs such as maintenance, utilities, hazard coverage and property taxes.
Only one EPC is allowed per transaction. An EPC cannot buy a business or its intangibles. The two companies count as one business for the $5,000,000 loan limit and the $3,750,000 guaranty cap. Every 20 percent owner of either company guarantees the loan. Example: an EPC owns a building and leases all 10,000 square feet to the operating company, which may sublease up to 4,900 square feet, 49 percent.
How it shows up in the data here
Not in any public file. The SBA loan file shows one borrower per loan and no flag for an EPC and operating company structure, so no lender page can show who uses it. Ask the lender whether it will lend to the structure, since each lender sets its own policy within SBA's rules.
Go further
- Package checklist: SBA 7(a) loan: Where the EPC test sits in the order lenders ask.
- SBA 7(a) loan package checklist: A 7(a) package is the bank's usual file plus SBA's own list. Know which items SBA requires and you can have them ready before the first call.
- SBA 504 loan package checklist: A 504 project has three parties, two loans and a closing date set by a monthly bond sale. Build the package for all three.
Related terms
- SBA size standard: SBA's test that a business and its affiliates are small enough for a loan: the limit for its industry in 13 CFR 121.201, or an alternative of $20 million net worth and $6.5 million net income.
- SBA occupancy requirement: The rule that a business using SBA money on real estate must occupy at least 51 percent of an existing building, or 60 percent of a new one, and may lease out the rest within set limits.
- SBA 7(a) loan: SBA's main business loan program. A lender makes the loan and SBA guarantees part of it: up to 85 percent of $150,000 or less and 75 percent of more, on loans up to $5,000,000.
- SBA 504 loan: A fixed-asset financing in which a bank lends 50 percent or more, a certified development company funds up to 40 percent through an SBA debenture, and the borrower puts in at least 10 percent.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.