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  • Writer's pictureRebecca Mendoza

Five common errors in EPC/OC loans

EPC/OC loans aren’t all that difficult.

But that doesn’t mean things don’t get missed! Sometimes the simpler something is, the easier it is to overlook something.

An Eligible Passive Company (EPC) is an exception to the CFR because of their passive income.

That means each condition allowing the exception must be carefully and strictly adhered to. And it means that a violation of those conditions will make the loan ineligible, and your guaranty will be denied. Not what you – or we – want!

Here are the five most common problems we see, with our recommendations for fixing – and avoiding – them.

1. Lease terms, including renewal options, don’t match the term of the loan.

  • The lease terms must not be even a single, solitary day short of your loan term. We all know this, so why is it such a common error? Because the term of your loan starts from your Note date, not underwriting. Often it’s within terms at the underwriting review, but SBA loans typically don’t close quickly!

  • Recommended fix: Review those lease terms closely. And consider requiring a lease to be at least one year longer than your loan term to ensure you remain in compliance.

2. The EPC isn’t actually passive.

  • Most EPCs are formed for the sole purpose of owning real estate. Therefore, your EPC must not have anything other than the passive income from the property you’re financing. If there’s other income, it’s no longer passive because it has operating income from other sources.

  • Recommended fix: If it’s an existing EPC, review its financials and tax returns to ensure there’s no income from anywhere else. If it’s a new EPC, stress to your client that it must be for the sole purpose of owning this property, and only this property, for the life of the loan.

3. The monthly rent payment exceeds the allowable payment amount.

  • If the monthly rent exceeds your loan payment plus any direct expense for the EPC holding the property (such as maintenance, insurance, or property taxes), then it’s making a profit and is no longer passive.

  • Recommended fix: Include a calculation table in your credit memo to ensure your underwriters address this key eligibility point early.

4. Subordination of the Lease.

  • We often find the Landlord’s Waiver in the file on an EPC/OC loan. But the Landlord’s Waiver is not enough. SBA’s SOP is clear: the Lender must obtain a Subordination of the Lease, and that’s not the same as the Landlord’s Waiver.

  • Recommended fix: Here’s where your procedures and checklists will save you! Include this, as well as all the other EPC/OC requirements, in your procedures and checklists so your staff remembers to address them throughout the loan process.

5. Working Capital financed was paid to the EPC.

  • You’d be surprised how this issue stealthily sneaks in at closing. How? You’re using a Closing Agent, Attorney, or Escrow Company who’s not familiar with SBA rules. The HUD-1 they prepare states “funds to borrower (who is also the EPC) at closing,” which clearly violates the EPC conditions.

  • Recommended Fix: Your closing instructions are key here. They must clearly state that any funds to Borrower at closing go directly to the Operating Company and not the EPC.

These are some of the common errors we see in our loan review and liquidation work, but there are a few more requirements beyond these that you need to address. Become familiar with the relevant section of the current SOP, and you’ll avoid making errors that could cause denial of your guaranty!

Want some help? We’ve been helping clients with EPC/OC loans (and many other SBA loans) for years. Schedule a call here and we’ll see how we can help you, from a complete loan review to help setting up your checklists and procedures.


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