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

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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

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 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.


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