When is a passive real estate company eligible for an SBA loan?

Why this structure exists

Section 120.110(c) makes passive businesses owned by developers and landlords ineligible when they do not actively use or occupy the assets financed. Many operating businesses hold their building in a separate company, often for liability or estate reasons. The Eligible Passive Company, or EPC, is the regulation's answer: an exception to the passive-business exclusion that works only if a set of conditions ties the real estate company tightly to the operating business. Section 120.111 says "any ownership structure or legal form may qualify as an Eligible Passive Company," so the focus is on conditions, not on whether it is an LLC, a corporation or a trust.

What the proceeds can be used for

The EPC must use loan proceeds only to acquire or lease, and improve or renovate, real or personal property, including eligible refinancing, that it leases to one or more Operating Companies for conducting their business. The other permitted use is financing a change of ownership between the existing owners of the EPC. If the Operating Company is a co-borrower, proceeds can also go to the Operating Company for working capital or to buy other assets, including intangible assets. In the 504 program, additional rules limit change-of-ownership financing when the EPC owns assets beyond the real estate.

The six conditions for every legal form

Under 120.111(a): (1) the Operating Company must be an eligible small business, and the proposed use must be one that would be eligible if the Operating Company were borrowing directly; (2) the EPC, except a trust, and the Operating Company must each be small under the part 121 size standards; (3) the lease must be in writing, subordinate to SBA's mortgage, deed of trust or security interest, with an assignment of all rents as collateral, and rent "cannot exceed the amount necessary to make the loan payment to the lender, and an additional amount to cover the Eligible Passive Company's direct expenses of holding the property, such as maintenance, insurance and property taxes"; (4) the lease, including renewal options exercisable solely by the Operating Company, must have a remaining term at least equal to the term of the loan; (5) the Operating Company must be a guarantor or co-borrower, and a co-borrower in a 7(a) loan that includes working capital or other assets for it; (6) each holder of at least 20 percent of either company must guarantee the loan.

The rent cap, with a number

The rent cap is the part with arithmetic. Suppose the EPC's loan payment is $8,000 per month, and its direct holding costs are $1,500 for insurance, property tax and maintenance. The highest rent the lease can charge is $9,500. A $10,000 rent would be $500 over. Enter those figures above to confirm. The rule prevents an EPC from using the lease to pull profit out of the operating business; the rent should cover the debt and the cost of holding the property, no more. The text does not say what happens to a lease that exceeds the cap, or how and when the cap is tested over the loan's life.

Trusts

For trusts, 120.111(b) adds conditions. The trustor's eligibility status determines trust eligibility, and all donors to the trust are deemed trustors for eligibility purposes. The trustee must warrant and certify that the trust will not be revoked or substantially amended during the loan term without SBA's consent. The trustor must guarantee the loan, and the trustee certifies authority to act, authority to borrow, pledge assets and lease the property, provides accurate trust agreement language, and supplies a true and complete list of all trustors and donors. A trust is also exempt from the size standard test in (a)(2).

How it fits with loan limits and guarantees

A loan to the EPC applies to the limits of both the EPC and the Operating Company under 120.151. The ownership-based guarantee requirement follows the 20 percent rule discussed on our guarantee page, with the difference that it looks across both companies. The size test uses the size standards. The text does not say how a lender computes the loan payment for the rent cap on a variable-rate loan.

Sources

• 13 CFR § 120.111, What conditions must an Eligible Passive Company satisfy?. Read November 2, 2026.
• 13 CFR § 120.110, What businesses are ineligible for SBA business loans?. Read November 2, 2026.
• 13 CFR § 120.151, What is the statutory limit for total loans to a Borrower?. Read November 2, 2026.

Text read: Electronic Code of Federal Regulations, Title 13, Part 120, current through the eCFR issue date of October 29, 2026. Dollar figures and percentages on this page are the ones printed in those sections as of that date; SBA can amend the rule and publishes loan-program procedures (such as SOP 50 10) that add detail this page does not cover. Confirm current terms with an SBA-approved lender or at sba.gov. This page summarizes the regulation and does not replace it.