[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

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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.

0
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