[Code of Federal Regulations]
[Title 13, Volume 1]
[Revised as of January 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 13CFR120.111]

[Page 223-224]
 
                TITLE 13--BUSINESS CREDIT AND ASSISTANCE
 
                CHAPTER I--SMALL BUSINESS ADMINISTRATION
 
PART 120_BUSINESS LOANS--Table of Contents
 
            Subpart A_Policies Applying to All Business Loans
 
Sec.  120.111  What conditions must an Eligible Passive Company satisfy?

    An Eligible Passive Company must use loan proceeds to acquire or 
lease, and/or improve or renovate, real or personal property (including 
eligible refinancing), that it leases to one or more Operating Companies 
for conducting the Operating Company's business (references to Operating 
Company in paragraphs (a) and (b) of this section mean each Operating 
Company). Any ownership structure or legal form may qualify as an 
Eligible Passive Company.
    (a) Conditions that apply to all legal forms:
    (1) The Operating Company must be an eligible small business, and 
the proposed use of the proceeds must be an eligible use if the 
Operating Company were obtaining the financing directly;

[[Page 224]]

    (2) The Eligible Passive Company (with the exception of a trust) and 
the Operating Company each must be small under the appropriate size 
standards in part 121 of this chapter;
    (3) The lease between the Eligible Passive Company and the Operating 
Company must be in writing and must be subordinated to SBA's mortgage, 
trust deed lien, or security interest on the property. Also, the 
Eligible Passive Company (as landlord) must furnish as collateral for 
the loan an assignment of all rents paid under the lease;
    (4) The lease between the Eligible Passive Company and the Operating 
Company, including options to renew 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 a co-borrower (with 
the Eligible Passive Company) of the loan (in a 7(a) loan including 
working capital, the Operating Company must be a co-borrower); and
    (6) Each holder of an ownership interest constituting at least 20 
percent of the Eligible Passive Company and the Operating Company must 
guarantee the loan (the trustee shall execute the guarantee on behalf of 
any trust).
    (b) Additional conditions that apply to trusts. The eligibility 
status of the trustor will determine trust eligibility. All donors to 
the trust will be deemed to have trustor status for eligibility 
purposes. A trust qualifying as an Eligible Passive Company may engage 
in other activities as authorized by its trust agreement. The trustee 
must warrant and certify that the trust will not be revoked or 
substantially amended for the term of the loan without the consent of 
SBA. The trustor must guarantee the loan. For purposes of this section, 
the trustee shall certify to SBA that:
    (1) The trustee has authority to act;
    (2) The trust has the authority to borrow funds, pledge trust 
assets, and lease the property to the Operating Company;
    (3) The trustee has provided accurate, pertinent language from the 
trust agreement confirming the above; and
    (4) The trustee has provided and will continue to provide SBA with a 
true and complete list of all trustors and donors.

[61 FR 3235, Jan. 31, 1996; 61 FR 7986, Mar. 1, 1996, as amended at 64 
FR 2117, Jan. 13, 1999]

                            Uses of Proceeds