EIDL Use of Funds and Real Need?

Question

We have been approved for the EIDL loan, but after taking a look at all of the requirements for use of funds, I can't see how it's advisable for landlords to take this loan, unless you are truly in need, hence the term disaster. At the time we initially applied all bets were off, and uncertainty abounded.

The only way that I can see accepting these funds would be to set up a new checking account for the funds to arrive in, and then use that account over the proceeding months to pay utilities, insurance, taxes, "Normal" mortgage payments, and anything else deemed working capital by the SBA. If doing so, this still seems like a back handed way to use the funds if most of your tenants are still paying rent. I emphasize most here.

Any other take on this loan? The collateral requirements, use of funds, etc seem to restrictive for the need in my opinion. Sure, I'd love to utilize their funds to pay off one of our mortgages, essentially refinancing, the debt, but that's not the point of the the whole loan program in the first place.

Nathan Gesner · Answer

Without getting political and being tattled on, I do predict something disastrous this fall. I think the real fallout from COVID will be further down the line.

I think renovations will be fine. Using EIDL to purchase new property does not meet the intent and will probably not survive an audit.

Bob Norton · Answer

@Chris McHaney The EIDL loan is for working capital to help your company to get through the pandemic.  So, you can use it for any operating expenses as a landlord, including mortgage payments.  If requested by the SBA, you will need to provide receipts of your operating expenses to prove that you are in compliance with the loan provisions.  So, make sure that you are keeping all of your receipts and other documents that you can use to prove what you spent the funds on.

You do not have to open another checking account for the loan, unless you are running your rental business through your personal checking account. (Although even that's not required in the SBA loan documents, but opening an account just for the loan proceeds avoids any claims of commingling loan funds with personal funds.)  The SBA is lending to your business, so you should be receiving the funds into your business account, anyway.

You will not be able to use the funds to refinance an existing mortgage, without the express permission of the SBA.  I'd recommend avoiding that.  You can use the loan proceeds to pay for all your operating expenses and then use any rents or income that you receive to go to paying down your mortgage.

I hope this helps.

Nathan Gesner · Answer

Keep in mind the EIDL is designed to keep help your business during this difficult time. It's not designed to expand your business. For example, you shouldn't use EIDL funds to purchase new properties, but you may be able to use them to improve existing properties. Talk to a CPA for advice.

I would anticipate an audit when it's all over. Therefore, it makes sense to put the funds in a separate account and heavily document how the funds are spent.

I applied for the EIDL and received a $6,000 grant based on six employees. I have not been contacted about the actual EIDL loan and it's been over two months since I applied. Even if I'm given the opportunity, I don't think I'll take it because the need no longer exists. I don't want to borrow money just because I can.

Bob Norton · Answer

@Calvin Thomas Depending upon the amount of the EIDL loan amount, the SBA may require collateral.  If he loan is greater than $25k, then you will be pledging the assets of the company toward the loan.  The SBA will file a UCC-1 as evidence of its security interest in the assets of the company.  This UCC-1 will not attach to the sub LLCs, so I would think that the sub LLCs will continue to be able to buy and sell real estate.  Since you are a developer, then real estate is considered inventory and the loan documents specifically says that the borrower may purchase or sell normal inventory in the ordinary course of business.

Brad Gibson · Answer

I applied for the EIDL grant in late March & received $1,000 as a grant since I have no employees paid by the LLC.

They sent a follow up email to confirm identity and bank information, but the loan has been “processing” for the last three weeks.

I don’t know if I’ll be approved or not. The loan would be a fabulous way to have larger reserves to cover mortgages, taxes, & other expenses on the event that tenants get into real trouble and stop paying rents.

Ideally, I could use the loan funds to pay the ongoing expenses while then dedicating the rent moneys that do come in to enhance the “free reserves” or dedicate to improving properties or even expanding the number of doors owned.

I don’t have high hopes for the loan to come through, but I’d be stoked to get it & it’ll make a difference in peace of mind as well as the ability to ride out any future bumps from Covid.

John Underwood · Answer

Do you not see the possibility of a second wave this fall that could be worse than first wave?

I think if you use the EIDL money to maintain your properties, pay mortgages and utilities if applicable as required and use incoming rents for your other stuff, that you would stand up to an audit.

I'm always replacing a roof or HVAC unit here and there, paying for HVAC repairs, plumbing issues beyond a stoppage etc.

I also have a house that really needs new windows as a repair to maintain the property. Maybe I replace half so as not to classify this as a possible upgrade.

When there is a turnover the house will always need some repairs or paint.

Calvin Thomas · Answer

Would you know if they are using real property as collateral?  Whereas the parent company took the EIDL loan and it's child LLC's own properties.  We cannot find or receive confirmation from the SBA if the assets in the child LLCs are pledged and restricted from buying and selling real estate for the time the loan is in effect.

Alin Dev · Answer

Thanks Bob for clarifying. I am planning to open a new checking account to house the EIDL and spend for future expenses from there. If I can use the loan amount to pay for past expenses (still during the pandemic), I can build up some capital for down payment on a property down the line.

Bob Norton · Answer

@Alin Dev The EIDL loan is to your company, not to you, so paying your personal taxes probably doesn't qualify.  My understanding is that the intent of the loan is to help your business make it through the slowdown due to the pandemic.  Covering operating expenses for your business from the date you received the loan going forward definitely qualifies, whereas reimbursing yourself for prior expenses is unclear.  If you have the funds and revenue to repay yourself and you were holding these funds for future operations, then you should have no problem repaying yourself from these funds and using the EIDL loan proceeds for present and future operating expenses.

Alin Dev · Answer

Question on the use of funds - if I get the funds from EIDL in mid July, can I use part of the loan amount to reimburse myself for the past operating expenses that occurred between Feb and July (like mortgage, insurance, taxes etc.)? Or can I use the funds only for future operating expenses that will occur after the loan amount is deposited in my account?

Also, I have to pay some income tax when I file on or about 7/15. I file Sched E (passive income, no LLC). Can I pay part or all of the taxes with the EIDL? I saw that IRS debt is one of the acceptable uses of the fund. Not sure if regular income tax payment qualifies as an IRS debt.

EIDL Use of Funds and Real Need?

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