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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
For Today’s Session
• Discussion of one of the diciest processing issues
facing 7(a) lenders – loans with EPC/OC structures . . .
• What
What’s
s eligible? What
What’s
s not?
• And – the chance to provide feedback to SBA as the
Agency considers possible changes to the EPC/OC
requirements
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Why do Small Businesses Choose
Holding Company Structures?
• Why do small businesses use holding companies to
own R/E, or major equipment?
• A
Avoid
id potential
t ti l liability
li bilit – e.g., medical
di l practice
ti
seeking to safeguard its building or major equipment
from malpractice suits
• Tax implications
• Estate planning
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
4
Basic Eligibility
§ 120.100 What are the basic eligibility requirements for
all applicants for SBA business loans?
To be eligible for an SBA business loan, a small business
applicant must:
(a) Be an operating business (except for loans to
Eligible Passive Companies). . .
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
5
Why does SBA have Special
Requirements for Holding Companies?
• Holding company structure interjects an extra layer in
the loan structure, BUT –
• Benefits
B
fit off loan
l
still
till accrue to
t operating
ti
company
• Major concern is that loan proceeds not be used for
passive investment purposes
• SBA requirements assure that holder of asset does not
benefit from SBA loan – no return on investment until
after 7(a) loan is repaid
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Evolution of SBA’s EPC/OC Requirements
• Originally SBA allowed holding company structures
only when holding company and operating company
had identical ownership – alter ego rule
• Reflecting actual business practices, SBA revised its
requirements to permit different ownerships of a
holding company and operating company, but –
• Always some identifiable overlap because tenants
don’t guarantee their landlord’s loans
...
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
7
Evolution of SBA’s EPC/OC (cont)
• In 4/2012 SBA published a Direct Final Rule intended to
allow EPCs and OCs to borrow funds for the OC’s
purchase of other assets for its use as long as the OC is
a co-borrower with the EPC
• Assets allowed to be purchased include stock or
intangible assets (such as trademarks, copyrights,
intellectual property, or goodwill)
• Unfortunately actual regulation and SOP did not fully
capture this intention, so continuing confusion
regarding what is allowed
...
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
8
Evolution of SBA’s EPC/OC (cont)
• SBA currently considering changes to clarify what is
permitted when EPC/OC structures
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Current Eligible Passive Company Eligibility
• EPC/OC rule allows financing to a third party owner when
specific requirements are met
• EPC must use loan proceeds to acquire or lease, and/or
improve or renovate real or personal property (including
eligible refinancing) that it leases to an active OC business
• OC MUST be a co-borrower with the EPC if part of proceeds
used for working capital or the purchase of other assets for
use by the OC, including the purchase of stock or intangible
assets
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Who is the Borrower?
• EPC = primary borrower [may take any form of business
structure, including tenants-in-common]
• Owns the asset
• Receives the financing for the asset
• Only one EPC per loan is allowed
• OC = either a co-borrower or a guarantor
• OC must be co-borrower if it receives any loan
proceeds for its use (e.g., w/c, asset purchase, stock
purchase, intangible assets, etc.)
• Multiple OCs are allowed
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
11
EPC Eligibility Requirements
• EPC and OC must each be small
• Proposed use of proceeds must be eligible as if OC
were obtaining financing directly
• OC must be co-borrower OR give unlimited guaranty
• All 20% or more owners of EPC and OC also must
personally guarantee
• Special requirements regarding trusts
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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EPC/OC Lease Requirements
• Lease restrictions assure that it is the OC, not the EPC
that controls the real or personal property
• EPC must lease project property directly to OC under a
written lease with a lease term (including options) at least
equal to loan term
• Lease payments must be assigned to debt
• Rent cannot exceed:
• Debt service + property upkeep + taxes + insurance
• OC(s) must lease 100% of property but can sublease
consistent with space occupancy requirements
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
13
Major Areas of Confusion
• When EPC/OC structures as eligible in change of
ownership situations
• What debt may be financed in change of when EPC/OC
structure
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
14
Let’s Look at Some Possible
EPC/OC Scenarios . . .
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Scenario 1
• Existing medical practice currently operating out of
leased space wants to use a holding company to
purchase the building from which it is operating
• Proposed EPC/OC loan structure with newly formed
entity holding real estate
• Holding company (EPC) will be borrower; medical
practice (OC) will give unlimited guaranty
• Eligible for 7(a) financing?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Scenario 1 – Analysis
• Loan is eligible as proposed subject to the following –
• EPC will be borrower
• OC may be either co-borrower or guarantor
• All 20% or more owners of each must fully guaranty
the loan AND
• All other EPC/OC loan conditions must be met –
• e.g., assignment of lease proceeds, amount of
lease payments, term of lease, space occupancy
requirements, etc.
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
17
Scenario 2
• Existing medical practice wants to finance the purchase
of an MRI machine which will be owned by a separate
holding company
• Proposed EPC/OC loan structure with newly formed
entity owning MRI machine
• Holding company (EPC) will be borrower; medical
practice (OC) will give unlimited guaranty
• Eligible for 7(a) financing?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Scenario 2 – Analysis
• Loan is eligible as proposed subject to the following –
• EPC will be borrower
• OC may be either co-borrower or guarantor
• All 20% or more owners of each must fully guaranty
the loan AND
• All other EPC/OC loan conditions must be met –
• e.g., assignment of lease proceeds, amount of
lease payments, term of lease, etc.
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Scenario 3
• Loan for complete change of ownership – business
assets currently owned by an operating business, R/E
currently owned by holding company
• Dad will be 100% owner of R/E & have 10% ownership
interest in operating business
• LLC owned
d by
b son and
d daughter-in-law
d
ht i l
will
ill own 90% off
operating business and will operate the business
• Proposed EPC/OC loan structure –
• One loan with EPC (dad) and OC (LLC) as co-borrowers,
proceeds for purchase of RE/ and other assets
• Eligible for 7(a) financing? ~ Can transaction be
financed with one loan?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
20
Scenario 4
• Loan requested for –
• Partner buy-out (two 25% owners buying out 2 other
25% owners) AND
• Refinance existing EPC/OC SBA-guaranteed loan that
was used to purchase RE
• Proposed as an EPC/OC structure
• Eligible for 7(a) financing as one loan?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Scenario 5
• Transaction = complete change of ownership
• One contract for total purchase – R/E, FF&E and goodwill
• Seller take-back to cover amount of FF&E and goodwill
• Proposed 7(a) loan for R/E portion of transaction only
• Applicant wants to create EPC to hold R/E with O/C
holding all other assets
• Proposed EPC/OC co-borrower structure
• Eligible as proposed? ~ Are 2 contracts required? ~ Is a
business appraisal required since SBA will only be
financing the R/E?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
24
Scenario 6
• Complete change of ownership including R/E and
business assets
• All assets currently owned by one corporation
tenants-in-common
in common
• Applicant wants to purchase R/E as tenants
(title in name of Mr. X and Mr. Y), and purchase all other
assets in newly established corporation
• Proposed EPC/OC loan structure with EPC and OC as
co-borrowers
• Eligible for 7(a)? ~ Okay for PLP processing?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
26
Scenario 7
• Multi-purpose loan –
• Refinance a seller take-back loan created 8 years ago
AND
• Purchase R/E that has been leased from seller since the
business purchase with R/E to be held by a holding
company
• Eligible for 7(a) financing as one EPC/OC structured loan?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Scenario 8
• Applicant, an operating small business, wants to buy
the stock of a real estate holding company that holds,
as its only asset, a parcel of R/E which applicant will
use for its business
• Applicant wants to continue to hold R/E in a holding
company
• Eligible for 7(a) 7(a) financing?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
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Scenario 9
• Existing holding company/operating company structure
– identical ownership of both EPC and OC
• One of 3 owners wants to buy out interests of 2 exiting
owners in both operating company and holding
company and refinance the debt of the companies
• Is loan eligible for 7(a) financing as EPC/OC? ~ Do
sellers need to quit claim to the O/C the R/E owned by
the EPC in order to make this transaction work?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
32
Questions?
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Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
34
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Session handouts available @
naggl.org/gateway
Copyright © 2016, NAGGL, Inc. All rights reserved. Nothing may be reprinted in whole or part without written permission from NAGGL.
Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
Copyright © 2016, NAGGL, Inc. All rights reserved. Nothing may be reprinted in whole or part without written permission from NAGGL.
Processing EPC/OC Structured Loans
2016 SBA Lending Technical Conference ~ St. Louis
Copyright © 2016, NAGGL, Inc. - Do Not Copy/Distribute
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