Updates on SBA Loans and Reg. A+
NAR is actively involved in efforts to enhance the flow of capital in commercial real estate, to protect and help members do business.
NAR continues to monitor industry reactions to the JOBS Act, and staff is committed to keeping you informed through REALTOR.org/Commercial/Advocacy where you can access a brief of all NAR commercial issues, as well as in-depth summaries. Now, let’s take a look at what’s been happening with SBA lending and Reg A+.
NAR continues to monitor industry reactions to the JOBS Act, and staff is committed to keeping you informed through nar.realtor/Commercial/Advocacy where you can access a brief of all NAR commercial issues, as well as in-depth summaries. Now, let’s take a look at what’s been happening with SBA lending and Reg A+.
Small Business Lending
Small businesses and REALTORS® go hand-in-hand. According to NAR’s 2015 Commercial Lending Trends report, the typical size of a commercial deal for NAR members is $1.6 million, indicating that they frequently work with clients who need small-to mid-size spaces. REALTORS® are experts in their communities, able to pair their clients with the type of space– whether industrial, office, or retail – that fits their needs.
Financing in the commercial real estate market is improving, but remains tight; small businesses often find getting financing more difficult than larger ones due to intensive underwriting processes that may rely on personal credit scores as an indicator of creditworthiness. That’s where the Small Business Administration comes in, with loan programs to meet a variety of needs. The SBA does not provide the funds, but instead guarantees a portion of the lender’s loan, with a total lending volume in 2015 of over $22 billion for 7(a) loans, and over $4 billion for CDC/504 loans.
General Small Business 7(a) loans (the most common) help creditworthy small businesses get financing when they otherwise cannot obtain credit at reasonable terms. It is a flexible program that can be used to finance a variety of business purposes, including improvements to land and buildings. Real Estate and Equipment CDC/504 loans provide financing for major fixed assets, such as equipment or land. These can be used to purchase existing buildings, improvements, and constructing new facilities/modernization.
To improve the application process and improve accessibility to SBA loans, the agency created the SBA One program, which began rolling out in the fall. SBA One streamlines the loan-application process, bringing many of the documents online and utilizing electronic signatures, saving banks time, money, and paper when processing applications. Additionally, the SBA created LINC (Leveraging Information and Networks to access Capital), a program that matches entrepreneurs and lenders through an online questionnaire to generate referrals for lenders and accessibility for borrowers.
The SEC continues to move forward with its JOBS Act rulemaking, designed to increase capital-raising opportunities for small businesses. This is the law that regulates crowdfunding, the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. Crowdfunding is a form of alternative lending that may become a new source of capital to commercial real estate. One of the big crowdfunding milestones in 2015 was the passage of Title IV of the JOBS Act, known as Regulation A+. It took effect June 19, designed to make it easier for small businesses to raise capital by removing many regulatory compliance hurdles that had been in place. The new rules allow companies to raise up to $50 million under Regulation A, which is a less-complicated route in terms of compliance and administration (the previous limit was $5 million). This new rule:
- Exempts companies using Regulation A from registration with state securities administrations
- Establishes two tiers of fundraising under Regulation A:
- Tier 1: up $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer
- Tier 2: $20-$50 million - for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issue. These funding efforts are also subject to ongoing review.
Meanwhile, observers are waiting to see how the new law will be used. The new compliance requirements are slowly becoming understood by participants, and crowdfunding platforms are adjusting their models to be in line with the new regulation.
Title III of the JOBS Act will go into effect January 29, 2016, which will enable crowdfunding for ventures up to $1 million, and allows unaccredited investors to participate in crowdfunding. Many observers feel this is ‘true crowdfunding’ because it opens investments to a significant population of investors through the unaccredited investor definition, which caps investor income or net worth at $100,000. Title III also articulates what regulatory compliance will exist for crowdfunding platforms and the companies that conduct a capital raise through a platform. Funding portals will be required to register with FINRA and the SEC and will be subject to ongoing reporting.