[Federal Register Volume 77, Number 63 (Monday, April 2, 2012)]
[Rules and Regulations]
[Pages 19531-19533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-7808]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AG48
7(a) Loan Program; Eligible Passive Companies
AGENCY: U.S. Small Business Administration.
ACTION: Direct final rule.
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SUMMARY: This direct final rule amends SBA's existing regulations to
clarify the eligible uses of loan proceeds by an Operating Company in
connection with an SBA-guaranteed loan to an Eligible Passive Company.
DATES: This rule is effective on May 17, 2012 without further action,
unless significant adverse comment is received by May 2, 2012. If
significant adverse comment is received, SBA will publish a timely
withdrawal of the rule in the Federal Register.
ADDRESSES: You may submit comments, identified by RIN 3245-AG48, by one
of the following methods: (1) Federal eRulemaking Portal:
www.regulations.gov; following the instructions for submitting
comments; or (2) Mail/Hand Delivery/Courier: Grady B. Hedgespeth,
Director, Office of Financial Assistance, U.S. Small Business
Administration, 409 Third Street SW., Suite 8300, Washington, DC 20416.
SBA will post all comments to this rule on www.regulations.gov. If
you wish to submit confidential business
[[Page 19532]]
information (CBI) as defined in the User Notice at www.regulations.gov,
you must submit such information to Grady B. Hedgespeth, Director,
Office of Financial Assistance, U.S. Small Business Administration, 409
Third Street SW., Suite 8300, Washington, DC 20416, or send an email to
[email protected]. You should highlight the information that you
consider to be CBI and explain why you believe SBA should hold this
information as confidential. SBA will review your information and
determine whether it will make the information public or not.
FOR FURTHER INFORMATION CONTACT: Grady B. Hedgespeth, Director, Office
of Financial Assistance, U.S. Small Business Administration, 409 Third
Street SW., Suite 8300, Washington, DC 20416; (202) 205-7562;
[email protected].
SUPPLEMENTARY INFORMATION: SBA generally makes business loans only to
small businesses engaged in regular business activities, and prohibits
such assistance to entities engaged in passive investment or real
estate development, or which do not engage in regular and continuous
activity as an operating business. SBA regulations at 13 CFR 120.111
currently provide an exception to this prohibition on providing
financial assistance to passive entities if the passive entity is an
Eligible Passive Company that leases real or personal property to an
Operating Company for use in the Operating Company's business and
complies with the conditions set forth in the regulation. SBA defines
an ``Eligible Passive Company'' or ``EPC'' as an entity that does not
engage in regular and continuous business activity, which leases real
or personal property to an Operating Company for use in the Operating
Company's business. An ``Operating Company'' or ``OC'' is an eligible
small business actively involved in conducting business operations now
or about to be located on real property owned by an Eligible Passive
Company, or using or about to use in its business operations personal
property owned by an Eligible Passive Company.
Section 120.111 requires the Eligible Passive Company to ``use loan
proceeds to acquire or lease, and/or improve or renovate, real or
personal property (including eligible refinancing).'' The regulation
does not specifically state the eligible uses of loan proceeds for use
by the Operating Company, but does require the Operating Company to be
a guarantor or a co-borrower (with the Eligible Passive Company) on the
loan. In a 7(a) loan including working capital for use by the Operating
Company, the regulation requires the Operating Company to be a co-
borrower.
When SBA promulgated the current regulations as described above, it
offered the following explanation for allowing the Operating Company to
be allocated a portion of the loan proceeds in a loan to an Eligible
Passive Company:
[I]t is common for an Operating Company to need working capital
when the Eligible Passive Company applies for a loan primarily to
finance the acquisition of real or personal property. In the past,
SBA has required the Eligible Passive Company to use the loan
proceeds solely to acquire and improve property for lease to an
Operating Company. Thus, two separate SBA loans would be needed--one
to the Eligible Passive Company for the real estate and the other to
the Operating Company for working capital.
(Notice of Proposed Rulemaking published in the Federal Register on
December 15, 1995 (60 FR 64356) and Final Rule published on January 31,
1996 (61 FR 3226).) At that time, SBA proposed and finalized a
regulatory change to allow a single loan to the EPC to be used, in
part, for working capital by the OC, provided the OC is a co-borrower.
The loan proceeds for working capital would be allocated to the OC,
while the loan proceeds for the acquisition and improvements of the
property for lease to the OC would be allocated to the EPC.
The practice of structuring a loan with the real estate held by an
EPC that leases the real estate to the OC for operation of its business
has become increasingly common. Further, it has come to SBA's attention
that many participating lenders have interpreted this rule to allow
EPCs and OCs to borrow funds for the OC's purchase of other assets for
its use, including the purchase of stock or intangible assets (such as
trademarks, copyrights, intellectual property, or goodwill), as long as
the OC was a co-borrower with the EPC. SBA recognizes the need for this
type of financing. Thus, in order to allow it to continue, SBA is
amending 120.111(a)(5) to clarify that if the OC is a co-borrower with
the EPC, part of the loan proceeds of a 7(a) loan may be used for
working capital or the purchase of other assets for use by the OC,
including the purchase of stock or intangible assets (such as
trademarks, copyrights, intellectual property, or goodwill). SBA is
also amending 120.120(b)(4) to conform with this change.
Because this is a clarifying amendment that is consistent with
industry practice, SBA expects no significant adverse comments. Based
on that fact, SBA has decided to proceed with a direct final rule
giving the public 30 days to comment. If SBA receives any significant
adverse comment during the comment period, SBA will withdraw the rule
and publish it as a proposed rule.
Compliance With Executive Orders 12866, 12988, 13132, and 13563, the
Paperwork Reduction Act (44 U.S.C. Ch. 35) and the Regulatory
Flexibility Act (5 U.S.C. 601-612)
Executive Order 12866
The Office of Management and Budget (OMB) has determined that this
direct final rule does not constitute a significant regulatory action
under Executive Order 12866. This direct final rule is also not a major
rule under the Congressional Review Act.
Executive Order 12988
This action meets applicable standards set forth in Sections 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have retroactive or preemptive effect.
Executive Order 13132
For the purposes of Executive Order 13132, SBA has determined that
this direct final rule will not have substantial, direct effects on the
States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Therefore, for the purpose of Executive
Order 13132, SBA has determined that this direct final rule has no
federalism implications warranting the preparation of a federalism
assessment.
Executive Order 13563
For the purposes of Executive Order 13563, SBA has received
meaningful feedback from the industry over the past several months and
has held discussions with various participating lenders that have
requested this clarification. All of the input SBA has received has
been supportive of this clarification.
Paperwork Reduction Act, 44 U.S.C., Ch. 35
SBA has determined that this direct final rule does not impose
additional reporting or recordkeeping requirements under the Paperwork
Reduction Act, 44 U.S.C., Chapter 35.
Regulatory Flexibility Act, 5 U.S.C. 601-612
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612, requires
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administrative agencies to consider the effect of their actions on
small entities, including small businesses. According to the RFA, when
an agency issues a rule, the agency must prepare an analysis to
determine whether the impact of the rule will have a significant
economic impact on a substantial number of small entities. However, the
RFA allows an agency to certify a rule in lieu of preparing an
analysis, if the rulemaking is not expected to have a significant
impact on a substantial number of small entities. This rule amends
existing Agency regulations to clarify the eligible uses of loan
proceeds for an Operating Company when it is a co-borrower with an
Eligible Passive Company and does not create new requirements. These
amendments will affect small entities; however, SBA has determined that
these amendments will not have a significant economic impact on a
substantial number of such entities.
List of Subjects in 13 CFR Part 120
Community development, Exports, Loan programs--business, Small
businesses.
For the reasons stated in the preamble, SBA amends 13 CFR part 120
as follows:
PART 120--BUSINESS LOANS
0
1. The authority citation for 13 CFR part 120 continues to read as
follows:
Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note,
636(a), (h) and (m), 650, 687(f), 696(3), and 697(a) and (e); Pub.
L. 111-5, 123 Stat. 115, Pub. L. 111-240, 124 Stat. 2504.
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2. Amend Sec. 120.111 by revising paragraph (a)(5) to read as follows:
Sec. 120.111 What conditions must an Eligible Passive Company
satisfy?
* * * * *
(a) * * *
(5) The Operating Company must be a guarantor or co-borrower with
the Eligible Passive Company. In a 7(a) loan that includes working
capital and/or the purchase of other assets, including intangible
assets, for the Operating Company's use, the Operating Company must be
a co-borrower.
* * * * *
0
3. Amend Sec. 120.120 by revising paragraph (b)(4) to read as follows:
Sec. 120.120 What are eligible uses of proceeds?
* * * * *
(b) * * *
(4) Working capital (if the Operating Company is a co-borrower with
the Eligible Passive Company, part of the loan proceeds may be applied
for working capital and/or the purchase of other assets, including
intangible assets, for use by the Operating Company).
* * * * *
Dated: March 26, 2012.
Karen G. Mills,
Administrator.
[FR Doc. 2012-7808 Filed 3-30-12; 8:45 am]
BILLING CODE 8025-01-P