The Small Business Administration (SBA) recently announced two new proposals, Small Business Commercial Real Estate and Working Capital programs. This on top of the previously announced proposals to increase the maximum loan size for the 7(a), 504, and Microloan Programs and to continue the Recovery Act Programs for loan origination fee relief and high guarantees for banks.
One of the new proposals aims to temporarily create a small business owner-occupied commercial real estate (CRE) refinancing to aid companies that might otherwise be foreclosed and liquidated. The CRE program will expand the SBA's existing 504/Certified Development Company (CDC) program for a set time to support refinancing for small business owner-occupied CRE loans that are maturing in the next few years and help refinance them in CRE. The difference here is that currently 504/CDC loans must only be used for new development or construction and can only include a limited amount of refinancing when businesses are expanding.
As usual, the devil is in the details. The CRE program would follow the 504/CDC program but:
n Limit eligibility to potential borrowers who have current loan structures of 50 percent or more commercial first mortgages, up to 40 percent SBA-backed debenture, and at least 10 percent borrower equity. A debenture is a type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer.
n The refinancing amount needs to be 90 percent of current independent appraised value or 100 percent of the outstanding principal, whichever is lower, plus allowable closing costs.
n A 70 percent loan-to-value (LTV) ratio would be required for debt issued to the same institution, and 50 percent LTV for new institutions.
n The proposal would allow for a 10- or 20-year term, whatever is appropriate, and lenders would have to write down or subordinate any debt in excess of the refinancing limits.
Another new proposal is to create larger working capital loans. Working capital is for expenses to operate a business such as payroll, insurance, inventory, utilities and office supplies.
The Obama administration is proposing to increase the SBA 7(a) working capital loans from $350,000 to $1 million. This program would affect the SBA Express loan, which allows banks to use their own paperwork, unlike traditional 7(a) loans. It also can be structured as a revolving line of credit. This proposal will need congressional action to come into effect.
One of the previous Obama administration proposals, which Congress has not acted on yet, would grant permanent increases to the SBA loan size. The Obama administration wants Congress to increase the ceiling on SBA's 7(a) and 504 loans from $2 million to $5 million. Caps on Microloans would rise from $35,000 to $50,000.
In addition, the Obama administration is seeking congressional appropriations to continue the Recovery Act's temporary increase of the SBA 7(a) loan guarantees and reduced fees for 7(a) and 504 loans through the end of Fiscal Year 2010 (Sept. 30).
The increased guarantee means that if a borrower defaults, banks or lenders are only responsible for 10 percent of the amount due. The federal government would be responsible for the other 90 percent. Thus, risk to the bank or lender is minimized and banks should be more willing to lend. Also, loan origination fees that are typically 1 to 2 percent of the loan are eliminated, making the cost of borrowing money cheaper in order to entice more borrowing.
The federal government is attempting to help Main Street get back on its feet with loan guarantees under generous terms. But all of these proposals, if enacted by Congress, are for naught in the local economy if Orange County and Chapel Hill do not take advantage of them.
Our area must have the business infrastructure in place to make it work. That means having available lots that are ready to be built on with power, water, sewer, and easy road access already in place, offices ready to move in to for start-up businesses, and banks with the knowledge and willingness to operate under these government programs.
Jeremy Todd Browner maintains a solo law practice in Chapel Hill.
