[Federal Register Volume 59, Number 35 (Tuesday, February 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3670]
[[Page Unknown]]
[Federal Register: February 22, 1994]
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SMALL BUSINESS ADMINISTRATION
13 CFR Parts 108 and 120
Development Companies and Business Loans; Passive Business
AGENCY: Small Business Administration (SBA).
ACTION: Notice of proposed rulemaking.
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SUMMARY: This proposed rule would allow certain passive businesses to
be eligible for SBA financial assistance under both the SBA's
development company and 7(a) business loan programs if the real estate
(or personal property) it holds would be used by an eligible small
business concern in which any owner of at least 20 percent of the
passive business owns at least 20 percent of the small business
concern. The proposed rule would eliminate many requirements and
restrictions which presently limit the use of real estate holding
entities in SBA's business loan and development company programs.
DATES: Comments must be submitted on or before April 25, 1994.
ADDRESSES: Comments may be mailed to John R. Cox, Acting Assistant
Administrator for Financial Assistance, Small Business Administration,
409 3rd Street SW., Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT:
John R. Cox, 202/205-6490.
SUPPLEMENTARY INFORMATION: Section 120.101-2(e) of SBA's regulations
(13 CFR 120.101-2(e) (1993)) provides that a real estate holding entity
(known as an alter ego) may be eligible as an applicant for financial
assistance under the SBA business loan program if it is organized and
operated for profit as a corporation, partnership or individual
proprietorship. It must be in the business of owning and leasing
property to an operating small business concern for the latter's
exclusive use. There must be an identity of ownership in the borrower
and the small business concern. The regulation also contains a
complicated description of certain familial relationships which qualify
as identical for purposes of ownership interest. The regulation also
requires as collateral for the assistance that: (1) The applicant
pledge the lease between it and the operating concern, (2) the
operating concern must be a guarantor or coborrower on the loan, and
(3) the owners of the operating concern must guarantee the loan.
Section 108.8(d) of the regulations governing SBA's development
company program (13 CFR 108.8(d) (1993)) allows a real estate holding
entity (known as an alter ego) to be eligible for a loan made pursuant
to that program if, among other requirements, it is a business
organized for profit, the ownership interests in the holding entity and
the small business concern to which it leases the property are
identical except for the complicated exceptions with respect to
selected family owners, the collateral for the assistance includes an
assignment of the lease between the holding entity and the small
business, and the small business guarantees the loan or is a co-
borrower. In addition, there is a provision which covers the
possibility that the operating concern could sublease part of the
property to a third party.
These detailed requirements and restrictions are confusing and
burdensome for the public. Numerous interpretations and guidelines have
failed to eliminate inconsistent treatment by SBA of applicant holding
entities from program to program. The public has become frustrated by
some of the subtle distinctions between the two programs with respect
to these real estate holding entities, and the SBA servicing of loans
which have been made to them has added to the general confusion.
SBA recognizes that valid business reasons (such as estate planning
or tax purposes) may exist for an operating small business concern to
spin off into an affiliate the real estate on which the operating
concern operates its business, and SBA wants to provide assistance in
such situations where possible. The Agency, at the same time, wants to
ensure that it will not finance purely passive investments in real or
personal property. The holding entity regulations were initially
promulgated fifteen years ago to accomplish this intent, but the
changes, revisions and amendments to the regulations have caused
confusion, inconsistency and frustration by the public and SBA
personnel.
Therefore, the Agency is proposing to simplify the present
regulations by eliminating many of the above referenced limitations and
restrictions. This proposed regulation, if enacted in final form, would
eliminate the inconsistency which is inherent under the present rules,
and it would greatly assist potential small business applicants which
seek SBA financial assistance through their real estate holding
affiliates. The Agency will no longer refer to the real estate holding
entity as an alter ego, but will consider it to be the passive
business.
It must be reiterated that SBA does not intend under this proposal
to finance a passive business or investment property which requires no
active involvement by the business owners. A passive business would be
an acceptable and eligible applicant under these proposed regulations
because it is a holding entity affiliated with an otherwise eligible
small business concern.
Under this proposal, a passive business applicant would be eligible
if the real estate (or personal property) it holds would be used by an
eligible small business concern and at least one 20 percent owner of
the passive business also owns at least 20 percent of the small
business concern. Under this proposal, a trust could qualify as an
eligible passive business if the grantor or trustee of the trust owns
at least 20 percent of the small business concern, or if a beneficiary
of at least 20 percent of the trust assets has at least a 20 percent
ownership in the small business concern. This ownership requirement
would identify the passive business with the operating business for SBA
regulatory purposes. The proposed regulation does not require that
there be more than one 20 percent owner of both entities or that the
principals control either entity. As long as one person is a 20 percent
owner in both entities that would be sufficient to make an entity the
eligibility passive business affiliate of the small business concern
since that person would be considered to be a principal in both
entities. Alternatively, if members of the same family (father, mother,
son, daughter, wife, husband, brother or sister) meet the 20 percent
ownership requirement in both the passive business and the small
business concern they would be considered to be the same principal for
SBA purposes.
Both the passive business and the small business concern would be
required to be obligated on the vote evidencing the assistance, and any
person who has a 20 percent ownership interest in both entities would
provide a personal guarantee to support the SBA financial assistance.
Proprietors, partners, officers, directors and owners of 20 percent or
more in either entity would also be subject to the collateral
provisions set forth in Sec. 120.103-2(c) of the SBA regulations.
Under this proposed rule, SBA would eliminate the present
requirement in the business loan program that the passive business must
only be a proprietorship, partnership or corporation in order to
accommodate SBA's policy that a trust can be an eligible passive
business if it otherwise comports with the requirements of this
regulation. It would eliminate the present convoluted and complicated
provisions which detail the listed family members who can hold
ownership interests in the passive business and small business concern
in varying percentages of ownership. It would also eliminate the
present requirement which mandates that non-family owners have complete
identity of interests. The purpose of these proposed changes is to
simplify the rules and to ensure that SBA financial assistance remains
available for a legitimate passive business affiliate of an eligible
small business concern when the affiliate holds real estate or personal
property leased to the small business concern and utilized for business
purposes. SBA has proceeded in its business assistance programs on the
assumption that a principal owns at least 20 percent of a business and,
under Sec. 120.103-2(c) of its regulations, SBA generally requires a
proprietor, partner, officer, director, or 20 percent owner to execute
a personal guarantee as collateral for the assistance. This requirement
would apply to such enumerated persons in either entity. Prudent
standards of banking practice will continue to dictate the rules in
providing SBA financial assistance to eligible passive businesses. In
addition, SBA would evaluate on a case by case basis whether the small
business concern must make use of all the real property subject to the
lease immediately after execution or whether it could sublease part of
the property for an interim period of time. SBA does not want to
interpose itself into the details of the arrangements, so long as the
Agency is assured, pursuant to the statutory provisions, that the
financial assistance will be repaid.
Compliance With Executive Orders 12612, 12778 and 12866, the Regulatory
Flexibility Act, 5 U.S.C. 601 et seq., and the Paperwork Reduction Act,
44 U.S.C. ch. 35
For purposes of the Regulatory Flexibility Act, 5 U.S.C. 601 et
seq., SBA certifies that this proposed rule, if promulgated in final
form, will not have a significant impact on a substantial number of
small entities.
SBA certifies that this proposed rule, if promulgated in final
form, will not constitute a significant regulatory action for the
purposes of Executive Order 12866, since the proposed change is not
likely to result in an annual effect on the economy of $100 million or
more.
SBA certifies that the proposed rule, if promulgated in final form,
would not impose additional reporting or recordkeeping requirements
which would be subject to the Paperwork Reduction Act, 44 U.S.C.
Chapter 35.
SBA certifies that this proposed rule would not have federalism
implications warranting the preparation of a Federalism Assessment in
accordance with Executive Order 12612.
Further, for purposes of Executive Order 12778, SBA certifies that
this proposed rule, if promulgated in final form, is drafted, to the
extent practicable, in accordance with the standards set forth in
section 2 of that order.
(Catalog of Federal Domestic Assistance Programs, No. 59.012, Small
Business Loans and No. 59.013, State and Local Development Loans)
List of Subjects
13 CFR Part 108
Loan programs--business, Small businesses.
13 CFR Part 120
Loan programs--business, Small businesses.
Accordingly, pursuant to the authority contained in section 5(b)(6)
of the Small Business Act (15 U.S.C. 634(b)(6)), SBA hereby proposes to
amend parts 108 and 120, chapter I, title 13, Code of Federal
Regulations, as follows:
PART 108--LOANS TO STATE AND LOCAL DEVELOPMENT COMPANIES
1. The authority citation for part 108 would continue to read as
follows:
Authority: 15 U.S.C. 687(c), 695, 696, 697a, 697b, 697c.
2. Section 108.8 would be amended by revising paragraph (d) to read
as follows:
Sec. 108.8 Borrower requirements and prohibitions.
* * * * *
(d) Eligibility of passive business. A concern is ineligible if it
is a passive business primarily engaged in investing in property,
Provided, however, That a passive business is eligible if it owns and
leases or it proposes to own and lease real or personal property to an
otherwise eligible small business concern so long as:
(1) The passive business and the small business concern share a
common principal, as defined in this paragraph (d);
(2) The passive business engages in no activity other than
acquiring or owning property which it leases to the small business
concern for its exclusive use within a reasonable period of time, and
the proceeds of any section 502 or 503 assistance are used only for
this purpose;
(3) The passive business and the small business concern are both
obligated on the note evidencing the SBA assistance;
(4) The collateral for the financial assistance includes a lien on
the property and an assignment of the lease (including options
exercisable by the small business concern) between the passive business
and the small business concern, and such lease has a remaining term at
least equal to the term of the section 502 or 503 loan;
(5) Each person who is a principal as defined in this paragraph (d)
must provide a personal guarantee, and Sec. 120.103-2(c) of this title
(relating to collateral) is applicable to all persons enumerated
therein who are associated with either entity; and
(6) For purposes of this paragraph (d), a person is a ``principal''
if he or she is the legal or beneficial owner of at least 20 percent of
both the passive business and the small business concern to which the
passive business intends to lease real or personal property. If the
passive business exists in the form of a trust, the trust's grantor or
trustee would be a ``principal'' if he or she owns at least 20 percent
of the small business concern, and a beneficiary of at least 20 percent
of the trust's assets would be a ``principal'' if he or she owns at
least 20 percent of the small business concern. If members of the same
family (father, mother, son, daughter, wife, husband, brother or
sister) meet the 20 percent ownership requirement in both the passive
business and the small business concern they would be considered to be
the same ``principal'' for SBA purposes.
* * * * *
PART 120--BUSINESS LOAN POLICY
1. The authority citation for part 120 would continue to read as
follows:
Authority: 15 U.S.C. 634(b)(6) and 636(a) and (h).
2. Section 120.101-2 would be amended by revising the introductory
text and paragraph (e) to read as follows:
Sec. 120.101-2 Type of business.
Most small concerns are eligible for Financial Assistance. The
following types of businesses, however, are not eligible for SBA
assistance except where otherwise stated in this section.
* * * * *
(e) Lending or investment; eligibility of passive business.
Concerns which are primarily engaged in the business of lending or
investing. However, an applicant business passively engaged in
investing in property is eligible for SBA financing or refinancing if
it owns and leases or it proposes to own and lease real or personal
property to an otherwise eligible small business concern, so long as:
(1) The passive business and the small business concern share a
common principal, as defined in this paragraph (e);
(2) The passive business engages in no activity other than
acquiring or owning property which it leases to the small business
concern for its exclusive use within a reasonable period of time, and
the proceeds of any SBA guaranteed loan shall be used only for this
purpose or for working capital by the small business concern;
(3) The passive business and the small business concern are both
obligated on the note evidencing the SBA guaranteed loan;
(4) The collateral for the financial assistance includes a lien on
the property and an assignment of the lease (including options
exercisable by the small business concern) between the passive business
and the small business concern, and such lease has a remaining term at
least equal to the term of the SBA guaranteed loan;
(5) Each person who is a principal as defined in this paragraph (e)
must provide a personal guarantee, and Sec. 120.103-2(c) (relating to
collateral) is applicable to all persons enumerated therein who are
associated with either entity; and
(6) For purposes of this paragraph (e), a person is a ``principal''
if he or she is the legal or beneficial owner of at least 20 percent of
both the passive business and the small business concern to which the
passive business intends to lease real or personal property. If the
passive business exists in the form of a trust, the trust's grantor or
trustee would be a ``principal'' if he or she owns at least 20 percent
of the small business concern, and a beneficiary of at least 20 percent
of the trust's assets would be a ``principal'' if he or she also owns
at least 20 percent of the small business concern. If members of the
same family (father, mother, son, daughter, wife, husband, brother or
sister) meet the 20 percent ownership requirement in both the passive
business and the small business concern they would be considered to be
the same ``principal'' for SBA purposes.
* * * * *
Dated: November 16, 1993.
Erskine B. Bowles,
Administrator.
[FR Doc. 94-3670 Filed 2-18-94; 8:45 am]
BILLING CODE 8025-01-M
