Can I purchase a property with residential mortgage then Triple Net Lease to my S-Corp to run B&B?

UPDATED: Sep 19, 2011

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Can I purchase a property with residential mortgage then Triple Net Lease to my S-Corp to run B&B?

We want to buy 4 room B&B in PA. Owner is selling property separate from business. Property has run as B&B for 14 years. Property is zoned R-2 (residential multi-tenant). We would like to buy property with residential mortgage (my wife works professionally and makes enough income to cover mortgage payment). Our family would be living in the house full-time. For the business, we would setup an S-Corp, pay cash for the business and then have S-Corp Triple Net Lease property to run the B&B. We’re being told we must get a commercial loan for this, but don’t understand why. Please explain.

Asked on September 19, 2011 under Real Estate Law, Pennsylvania


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

Ultimately, banks get to decide what kind of a loan they will give people (as long as they don't discriminate on the basis of a protected category, like race, disability, etc.), so  the short answer is that if banks will only grant you a commercial loan for this, that's why you need a commercial loan.

As to why that may be the case:

1) Even if you are going to live there, you intend to run the building as a B&B. Therefore, this is NOT primarily a residence; it's a business that you will live at. The financial picture and risk profile is different (as are your documentation, insurance, etc. needs).

2) By having a triple net lease to the S-Corp. and then having the S-Corp run the B&B, you are offloading much of the obligations and liability to the S-Corp--again, changing the overall financial and risk picture.

A residential mortgage is intended for property used as residence. You are intending to use your property as a business, just one you happen to live at. It should not be surprising that a bank wants to treat your business as a commericial endeavor.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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