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Larger Owner-Occupied Properties to Qualify for SBA Programs

September 22, 2010

With last week's passage of the Senate version of what's been dubbed the Small Business Jobs Act, it appears a lot more taxpayer capital will soon be on the way to help fund small-balance commercial mortgages - mostly those secured by owner-occupied properties.

Enthusiastically welcomed by capital-challenged small business lenders and credit-starved borrowers, the Act expands and enhances Small Business Administration lending programs, while also establishing a $30 billion community bank lending fund and strategically cutting small business taxes with an eye toward jobs creation.

The bill more formally known as HR 5297 now returns to the House of Representatives, which passed its similar version three months ago. The general expectation is that the Senate version will pass in the House shortly. President Obama is itching to sign the final bill.

According to the president of a major SBA lender group, more than 100 small business trade associations support the Act. "Nearly every major small business trade group supports it," relates Tony Wilkinson, president of the National Association of Government Guaranteed Lenders.

Nevertheless only two Republicans ultimately voted for the Senate version.

A key component of the Act is that is would allow larger businesses, and larger properties, to qualify for the SBA's signature 7(a) and 504 taxpayer-guaranteed lending programs.

Businesses with tangible net worths of up to $15 million could qualify on an interim basis, nearly doubling the current $8.5 million. And the maximum average net income over the previous two years would likewise rise from $3 million to $5 million.

Meanwhile SBA officials would look to set permanent size standards for 7(a) and 504 borrowers based on net worth and net income - representing a shift from standards based on employees or average annual receipts. Maximum loan sizes would also rise.

"The legislation's SBA loan program incentives will allow community banks to expand lending to deserving small business borrowers," Independent Community Bankers of America president/CEO Camden R. Fine wrote to leaders of the Senate and its Committee on Small Business and Entrepreneurship.

The legislation would permanently raise the maximum loan size in the SBA 7(a) program to $5 million from $2 million. And for one year from the date it is enacted, it would raise the maximum loan size of the 7(a) Express program to $1 million from $350,000.

And it would at least temporarily retain the stimulus-related boost in the SBA-guaranteed portion of 7(a) loans, i.e., up to 90 percent of principal from the standard 75 (this temporary hike had mostly expired in May).

As NAGGL members know so well, floating-rate 7(a) loans, typically secured by real estate (and personally guaranteed by business owners), help small businesses finance or refinance facilities and equipment at taxpayer-subsidized, below-market interest rates.

Veteran SBA lender John King, founder of Green Commercial Capital in Roswell, Ga., notes on his small business finance blog that the increase of the guarantee level to 90 percent has helped boost borrower demand for these loans while incentivizing banks to make more of them. Compared to the 75 percent level, lenders get higher secondary market prices for 7(a) loans, are better protected, and need less capital to make new loans.

As for the fixed-rate 504 program, a key provision of HR 5297 temporarily (for two years from enactment) allows small business owners to use proceeds to refinance maturing mortgages on their owner-occupied properties. Previously 504 loan proceeds could only be used to purchase or improve real estate.

With so much commercial mortgage debt scheduled to mature over the coming few years, the expectation is that many small business owners will leap at the opportunity to refinance with high-leverage, low-cost 504 loans. This program is structured on a 50-40-10 basis, i.e., a bank funds a real estate-secured loan at 50 percent of capitalization, a specialty lender provides the SBA-guaranteed 40 percent tranche, and the borrower puts 10 percent down.

The Act would also permanently raise maximum SBA-guaranteed 504 loan sizes from a range of $1.5 million to $4 million, up to a range of $5 million to $5.5 million.

Another mechanism for pushing SBA, and other property-secured and related small business lending created through the Act, is the $30 billion Small Business Lending Fund.

In simple terms, the U.S. Treasury would infuse capital into banks with assets of less than $10 billion, and receive a dividend rate that declines in proportion to the institution's increase in small business lending in the near-term.

"The Tier 1 capital banks receive can be leveraged to provide as much as $300 billion of new credit to small business," according to ICBA's Fine.

HR 5297 also establishes an additional $1.5 billion fund allowing for grants to assist state and local government programs that funnel capital into businesses.

The measure also offers various tax breaks for small businesses, said to be valued at $12 billion, that would presumably further boost borrower demand. Among other benefits these include excluding business investments from capital gains liabilities; allowing more of these expenses to be expensed; and extending first-year "bonus depreciation" write-offs of equipment expenditures and now some real property investments as well.

Wilkinson is predictably encouraged that the multiple tax relief measures will generate more small business investment and hiring. "I think they're all going to be helpful."

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