Observing EPC/OC Requirements When Buying Real Estate and Businesses with an SBA Loan
Borrowers can limit their personal liability and protect their other assets in the event of a business failure.
What is an EPC and an OC?
An eligible passive company (EPC) is a real estate holding company that owns the property that an operating company (OC) uses to operate its business. The OC is the business entity that actually operates the business.
The SBA uses EPC/OC structures in some loan programs, such as the 504 loan program, to help small businesses purchase commercial real estate. By using an EPC/OC structure, borrowers can limit their personal liability and protect their other assets in the event of a business failure.
Why are EPC/OC structures used in SBA loans?
The SBA uses EPC/OC structures in some loan programs for a number of reasons:
- To limit personal liability: When an EPC/OC structure is used, the borrowers' personal assets are protected from liability in the event of a business failure. This is because the EPC is a separate legal entity from the OC.
- To protect other assets: If the borrowers have other assets, such as personal real estate or investments, they can be protected from liability in the event of a business failure by using an EPC/OC structure.
- To comply with certain SBA requirements: For example, the SBA requires that 504 loan borrowers must occupy at least 51% of the property that they are purchasing with the loan. By using an EPC/OC structure, borrowers can comply with this requirement even if they do not need to use the entire property for their business operations.
How to comply with SBA EPC/OC requirements
Borrowers who are using an SBA loan to purchase commercial real estate must comply with a number of specific requirements related to EPC/OC structures. These requirements include:
- The EPC and OC must be separate legal entities with their own separate tax IDs and business licenses.
- The EPC cannot be owned by the OC or its owners.
- The EPC must lease the property to the OC at a fair market rate.
- The lease agreement must be co-terminus with the SBA loan term.
- The lease agreement must give the OC the right to renew the lease for at least one additional term.
- The OC must occupy at least 51% of the property.
- The EPC cannot participate in the day-to-day operations of the business.
Additional tips and guidance
Here are some additional tips and guidance for complying with SBA EPC/OC requirements:
- Have a qualified attorney review all of the documentation. The documentation for an EPC/OC transaction can be complex and it is important to have a qualified attorney review all of the documentation to ensure that it complies with SBA requirements.
- Get pre-approval for the SBA loan. Before you sign any contracts or purchase any property, you should get pre-approval for the SBA loan. This will help you to avoid any surprises and ensure that you are eligible for the loan.
- Work with a qualified SBA lender. The SBA has a network of qualified lenders that can help you with the SBA loan process. These lenders have experience with EPC/OC transactions and can help you to comply with all of the SBA requirements.
By following these tips and guidance, borrowers can increase their chances of successfully obtaining an SBA 504 loan and complying with all of the SBA's EPC/OC requirements.
Please note that this article is intended to provide general guidance. It is not a substitute for specific legal advice on your unique situation. Please consult with a qualified business and real estate attorney before making any decisions based on this article.