Small Business Jobs Act: 504 Loan Program Debt Refinancing
Federal Register Extracts
Oct 12, 2011 (Menafn - Small Business Administration Documents and Publications/ContentWorks via COMTEX) --SUMMARY: This rule finalizes the interim final rule that implemented section 1122 of the Small Business Jobs Act of 2010, which authorizes projects approved for financing under Title V of the Small Business Investment Act to include the refinancing of qualified debt. As a result of comments received, this final rule amends the interim final rule to authorize the financing of business expenses as part of a Refinancing Project, to allow the Third Party Loan to be at least as much as the 504 loan instead of requiring that the Third Party Loan provide at least 50% of the financing, and to revise the definition of qualified debt. Other aspects of the interim final rule are adopted as final without change.
EFFECTIVE DATE: Effective Date: This rule is effective October 12, 2011.
FOR FURTHER INFORMATION CONTACT: Andrew B. McConnell, Jr., Office of Financial Assistance, at email@example.com or 202-205-9949.
SUPPLEMENTARY INFORMATION: On February 17, 2011, SBA published an interim final rule with request for comments in the Federal Register to implement section 1122 of the Small Business Jobs Act of 2010 (Jobs Act). See 76 FR 9213. This provision of the Jobs Act temporarily authorizes projects approved for financing under Title V of the Small Business Investment Act to include the refinancing of qualified debt. Prior to the Jobs Act, in a typical 504 project with a refinancing component, the borrower was required to use a significant portion of the loan proceeds for expansion of the business. See 13 CFR 120.882(e). The temporary Jobs Act program authorizes the use of the 504 Loan Program for the refinancing of debt where there is no expansion of the small business, and is available for loan applications approved by SBA through September 27, 2012.
The interim final rule was effective February 17, 2011 and the comment period was open until May 18, 2011. SBA received written comments from 34 commenters, including 6 banks, 2 small businesses, 17 Certified Development Companies, 3 national trade associations, and 6 individuals. The comments are summarized and addressed below with, where applicable, the citation to the rule provision that has been changed after consideration of the comments.
II. Summary of Comments Received
1. Financing for Business Expenses--13 CFR 120.882(g)(6). In the interim final rule, SBA requested comments from the public on whether, and how, to implement the provision in the Jobs Act that authorizes the financing of business expenses in the temporary debt refinance program. Twenty-five of the 34 comments received requested that SBA implement the authority to finance business expenses; none of the comments opposed implementing this authority. Several commenters stated that there is an urgent need for this financing due to the national recession which, they assert, resulted in bank regulator restrictions on lending institutions, limitations on lines of credit, and decreased opportunity for equipment vendor financing. Businesses could enhance their viability and growth potential if they were able to access the accumulated equity in their real estate and other fixed assets for business purposes. No suggestions were received on how to implement the business expense provision.
Based on the comments, SBA is amending the rule to allow a Borrower to request the financing of business expenses as part of its application for the Refinancing Project. Such financing will be available only if the amount of cash that will be provided as a result of the refinancing exceeds the amount to be paid to the lender of the Qualified Debt. The Borrower's application must include a specific description of the business expenses for which the financing is requested and an itemization of the amount of each expense. The funds provided for business expenses must be used solely for the business expenses of the Borrower, such as salaries, rent, utilities, inventory, and other obligations of the business. The expenses may have been incurred, but not paid, prior to loan application or may be used to pay for expenses that will become due for payment within eighteen months after the date of loan application. Both the CDC and the Borrower will be required to certify in the application that the funds will be used to cover the business expenses of the Borrower. Borrower must be able, upon request, to substantiate the use of the funds provided for business expenses, through, for example, bank statements, invoices marked "paid", cleared checks, or any other documents that demonstrate that a business obligation was satisfied with the funds provided.
2. Third Party Loan Less than 50% --13 CFR 120.882(g)(5). The interim final rule requires that the Third Party Loan contribute not less than 50% of the Refinancing Project amount, the 504 loan contribute not more than 40% of the Refinancing Project amount, and the Borrower contribute not less than 10% of the Refinancing Project amount. However, while the typical 504 Project includes a Third Party Loan equal to 50% of the Project costs, the regulations for a 504 Project other than debt refinancing require only, with certain exceptions not applicable here, that the financing for the 504 Project include one or more Third Party Loans that total at least as much as the 504 loan. See 13 CFR 120.920(a). Sixteen comments were received requesting SBA to apply to a debt refinancing project the same loan structure requirement that applies to other 504 Projects, and not require the Third Party Loan to be 50% of the Refinancing Project. Commenters observed that the 50% contribution is not required by Section 1122 of the Jobs Act. SBA has considered these comments and concludes that it serves the interest of this temporary debt refinancing program to amend the interim final rule to make it consistent with 13 CFR 120.920(a), requiring that the Third Party Loan total at least as much as the 504 loan.
3. Qualified Debt Criteria: Substantially all of loan proceeds used to acquire Eligible Fixed Asset --13 CFR 120.882(g) (15) (Definition of Qualified Debt, subparagraph (iii)), and 13 CFR 120.882(e)(1). To qualify for refinancing, the Jobs Act requires, among other criteria, that the debt to be refinanced be a commercial loan "the proceeds of which were used to acquire an eligible fixed asset". See SEC 502(7)(C)(i)(III)(aa)(DD) of the Small Business Investment Act. In promulgating the interim final rule, SBA was aware that the Borrower may have refinanced such a loan one or more times after the original financing and used available equity in the asset to finance working capital or other expenses. Consequently, SBA provided in the interim final rule that the commercial loan would meet this criteria if "substantially all (85% or more) of [the loan] was for the acquisition of Eligible Fixed Assets", See 13 CFR 120.882(g)(15); the remaining 15% of the proceeds must have been used for other purposes for the benefit of the Borrower. SBA stated in the preamble to the interim final rule that the Borrower would be required to certify that the existing debt satisfies these requirements, and that the Third Party Lender would be required to certify that it has no reason to believe that the existing debt does not satisfy these requirements. In addition, SBA stated in the preamble that SBA may require, on a random basis, for a borrower and/or lender to submit additional documentation supporting the "substantially all" assertion.
SBA received 19 comments expressing concern as to the ability of a small business to provide adequate documentation to support the "substantially all" standard. In particular, for loans involving more than one refinancing and lending institution, the commenters stated that it would be extremely difficult and burdensome to attempt to document the components of the existing debt. Consequently, SBA has reconsidered this criteria and is amending the interim final rule to recognize the economic reality that many loans for which borrowers will be seeking refinancing under the Jobs Act may have already been refinanced one or more times and that borrowers may have been able to borrow against the equity that was created in the Eligible Fixed Asset after its original financing. Accordingly, SBA is amending the rule to provide that, if the Eligible Fixed Asset was originally financed through a commercial loan that would have satisfied the "substantially all" standard (the "original loan") and that was subsequently refinanced one or more times, with the current commercial loan being the most recent refinancing, the current commercial loan will be deemed to satisfy the "substantially all" standard. With respect to situations where the Borrower leased the property acquired with the original loan to one or more tenants, SBA recognizes that the original loan may not have satisfied the leasing policies set forth in 13 CFR 120.131 and 13 CFR 120.870(b), but that the Borrower would be able to demonstrate that it satisfies SBA's leasing policies with respect to existing buildings as of the date of application for assistance under the Jobs Act. SBA believes that such Borrowers should be eligible for this assistance and is amending the rule to provide that, if the original loan was for the construction of a new building, or the acquisition, renovation, or reconstruction of an existing building, and such loan would not have satisfied the leasing policies set forth in 13 CFR 120.131 and 13 CFR 120.870(b), the current commercial loan will be eligible for assistance if the Borrower is able to demonstrate compliance with 13 CFR 120.131(b) for existing building as of the date of application for assistance under the Jobs Act.
--This is a summary of a Federal Register article originally published on the page number listed below--
CFR Part: "13 CFR Part 120"
RIN Number: "RIN 3245-AG17"
Citation: "76 FR 63151"
Federal Register Page Number: "63151"
"Rules and Regulations"
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