Are RE investors eligible for PPP grants and EIDL loans?

Question

Below is my unsuccessful attempt to understand SBA rules - an area new to me, so I have an excuse.

PART 1 - FLIPPING and SBA

I was prompted to look into this after one of our clients, a flipper, showed us an interesting affidavit that his bank made him sign while applying for PPP. The affidavit said:

“Building or constructing homes for future sale (50% or more of business revenue derives from building a home under contract with an identified Purchaser is eligible)” I certify that the above requirement applies to the applicant business.

My research led me to this SBA document from 2011 that describes SBA lending rules
https://www.sba.gov/sites/default/files/files/SOP%2050%2010%205%28D%29%20%289-15-11%29%20clean_0_5.pdf

The current SBA guidance linked to these old rules for PPP eligibility. Buried in the document is the mention that so-called "speculative" businesses are ineligible:

"Speculative businesses include: ...(e) Building homes for future sale (except under the Builders CAPLine program). Note: Construction of homes for future sale with no sales contract in place (spec homes) is eligible under the Builder’s CAPLine program. (13 CFR120.391)"

I decided to look into the law cited above, and it says:

"Under section 7(a)(9) of the Act, SBA may make or guarantee loans to finance small general contractors to construct or rehabilitate residential or commercial property for resale. This program provides an exception under specified conditions to the general rule against financing investment property. “Construct” and “rehabilitate” mean only work done on-site to the structure, utility connections and landscaping."

This left me scratching my head, with no answers:

• The law seems to say yes to flipping
• The guide seems to say yes, but only if there is no sales contract in place (which suits flippers)
• The bank affidavit seems to say yes, but only with sales contract in place (huh?)

If someone can make sense of all this, please enlighten this confused accountant. I blame it on my ESL classes.

By the way, I seem to not be the only one confused, judging from this article:
https://www.bisnow.com/national/news/economy/construction-companies-eligible-for-cash-under-cares-act-but-homebuilders-still-in-limbo-103805

PART 2 - INVESTING and SBA

That old SBA guide (and it is specifically referred to in the SBA guidance on PPP) has another troubling section, listing businesses that are ineligible:

"Passive Businesses (13 CFR 120.110 (c))
(1) Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under 120.111) are not eligible.
(2) Businesses primarily engaged in subdividing real property into lots and developing it for resale on its own account are not eligible.
(3) Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible. For example, shopping centers are not eligible...
(4) Apartment buildings and mobile home parks are not eligible. But, hotels, motels, recreational vehicle parks, marinas, campgrounds, or similar types of businesses are eligible if more than 50% of the business’s revenue for the prior year is derived from transients who stay for 30 days or less at a time..."

The law itself is not nearly this specific:

"...Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds..."And again I'm left with unanswered questions:

• These rules were put in place to prevent SBA lending for acquisition and improvement of real estate. OK, fine. But PPP program is lending money for payroll, not for acquisitions or improvements. Are investors excluded anyway?
• What about EIDL loans?
• What happens if a real estate investor already received PPP money, as some have? No forgiveness? Immediate return of funds?

At least I have company as far as being confused, so I don't feel hopelessly dumb:
https://www.forbes.com/sites/brendarichardson/2020/04/11/apartment-industry-urges-sba-treasury-to-close-paycheck-protection-loophole/

Greg O'Brien · Answer

The notion about taking the grant and declining the loan is not fact. SBA caught on to this real quick and this was not the intent of the law.

Account Closed · Answer

@Kevin Gray

I applied for the loan, because when I spoke with the SBA office originally to get some general info, they said when I was estimating losses, I needed to look at it over the course of a year (since they also request revenue and expenses for the past year). While I may not need the loan now, if this coronavirus stuff continues for 6-12 months, I very well may need it down the road. I'm not gonna wait until then to plan for an emergency (the funds may not even be available then). The way I see it, there's no prepayment penalty, so if the country pulls out of all this soon, and I didn't need the funds, then I can pay back the loan if I wanted. The person I spoke with even recommended that I apply.

Kevin Gray · Answer

The "free" or "cheap" money totally defeats the purpose of these loans and will bite those that take it for those purposes in the ass!

With such little factual information, we've been informing clients that if you need the loans, you might as well apply. If you actually receive the loans and then a month from now we find out those loans won't be forgiven for real estate investors, landlords, flippers, developers, etc... there is NO prepayment penalty. Just pay it back at that time without penalty or tax consequences.

Or if you desperately need the funds, the loan terms are very generous and can still be used to keep your business afloat....even if the amounts are not forgiven. Flexibility and careful planning is very important through this situation.

Michael Plaks · Answer

I'm very familiar with how the two programs work.

What my post is about is the legal uncertainty on whether REI businesses can apply AT ALL.

Account Closed · Answer

@Greg O'Brien

Interesting. When I spoke with the SBA office, they brought that up to me (i.e. keeping the grant if you don't need the loan). That's the only reason I even know of it. Their exact words to me were, "the grant may be all your business needs during the outbreak, so if you don't need the loan you can deny that, and still take the grant..."

Account Closed · Answer

@Michael Plaks

I'm not sure about PPP but I can speak into the EIDL and $10K grant though.

The way it works is, you have to apply for the SBA loan (up to $2MM) in order to be eligible for the (up to $10K) grant. If you are approved for the loan, you CAN decline it, and still take the grant...or you can take both the grant and the loan.

I applied about 2.5 weeks ago, and haven't heard anything yet. Now that the additional funding was agreed upon in Congress yesterday, I'm hoping they approve me for the grant and the loan (it's cheap money!).

Hope this helps,

CJ

Greg O'Brien · Answer

^^ good point!

Michael Plaks · Answer

Besides, any EIDL grant received reduces forgiveness of PPP loan, so you will have to pay it back

Are RE investors eligible for PPP grants and EIDL loans?

Are RE investors eligible for PPP grants and EIDL loans?

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