SBA Pivots to Say HUBZone Firms in Redesignated QDA Cannot Maintain 10-Year Principle Office Eligibility Through Long-Term Investment

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PilieroMazza PLLCIn January, we issued a client alert discussing how HUBZone firms in redesignated areas could plan to maintain their HUBZone status after the end of 2021. One of the primary strategies we discussed in the client alert was based on Small Business Administration (SBA) guidance about long-term investments in qualified disaster areas (QDAs). At the time, based on SBA guidance, we understood that HUBZone firms located in redesignated areas could qualify their current HUBZone principal office location as HUBZone eligible for at least the next 10 years as long as they entered into a long-term lease or bought its building before the firm’s annual HUBZone recertification in 2021. This guidance, which SBA first issued last October, hinged on whether the redesignated area was also a QDA. While SBA does not permit firms to take advantage of the new 10-year investment rule in a redesignated area, SBA’s guidance indicated that they would allow firms to take advantage of the 10-year rule if the redesignated area was also a QDA.

Surprisingly, SBA recently changed its mind about QDAs and is now taking the position that a firm located in a redesignated area that is also a QDA cannot take advantage of the 10-year rule for its principal office. This means that firms located in a redesignated area / QDA should not enter into a long-term lease or buy their building this year with the expectation that doing so will qualify their principal office location as HUBZone eligible for at least the next 10 years. If you are in a redesignated area / QDA that is currently scheduled to lose HUBZone eligibility at the end of 2021, you will need to explore other alternatives to maintain HUBZone eligibility beyond the end of this year.

SBA is expected to issue new guidance soon to confirm its changed approach to QDAs, but the change is already on SBA’s website. Unfortunately, we know that many firms may have entered into long-term leases or bought their buildings in a QDA based on SBA’s prior guidance. As yet, SBA has not formally created an exception for firms that relied on the prior guidance, but informally, SBA has indicated to us that they will consider the circumstances on a case-by-case basis. Therefore, if you entered into a long-term lease or bought your building between October 8, 2020, and March 30, 2021, based on SBA’s prior guidance indicating you could take advantage of the 10-year rule by making a long-term investment in a QDA, you should contact the Director of SBA’s HUBZone Program to explain your situation and request an exception. If you would like our assistance with this request, please do not hesitate to contact us.

We have also heard rumors that SBA may extend the freeze on the HUBZone maps beyond the end of this year to permit more time for the results of the 2020 Census to update the HUBZone maps and give affected HUBZone firms more time to plan. We are anxiously awaiting official word on this and other new SBA HUBZone guidance, which is expected soon. We will update this client alert when more information is available.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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