Small Business Administration Makes Positive Changes To Loan Programs

Finalized in December 2017 and effective January 1, 2018, the U.S. Small Business Administration (SBA) has updated its standard operating procedure (SOP) relating to equity requirements for its 7(a) loan program, lowering them from 25% to 10%.

The 7(a) loan program is the SBA’s most popular, allowing small business borrowers to obtain up to $5M in loans to fund startup costs, which include the purchase of new land (including construction costs), repairs to existing capital, and purchasing or expanding an existing business. In addition to lowering the equity requirements for the 7(a) program, the SOP update also streamlines and improves the administration of SBA 504 Loans, or the Certified Development Company program, which provides long-term, fixed-rate financing for the acquisition of fixed assets (frequently real estate, buildings, and machinery) necessary for small businesses to grow.

Though it remains to be seen how the lenders themselves will respond to the lower equity requirements, the SOP update may provide greater accessibility and flexibility, and more lending, for small business working with the SBA – potentially spurring growth throughout the country. NAR Commercial members frequently work with small businesses as clients, and according to NAR’s Commercial Real Estate Lending Trends 2017 report, 6% worked with the SBA loans programs and 16% used the SBA to refinance existing loans.

These positive changes come about following several collaborative years between NAR and the SBA, during which with NAR has provided the SBA feedback on lending programs and worked to raise awareness among REALTORS® of the options the agency provides. During that time, along with the SOP update, the SBA unveiled “SBA One,” a program to modernize the agency and make it more responsive to borrower’s needs. SBA One streamlined the application process for borrowers and created new options and opportunities for borrowers and lenders to find each other. NAR continues to work closely with the SBA to improve their programs and educate members on their availability and uses, including education sessions and panels at the NAR conferences featuring the SBA Administrator and Program Officers.

A Glance at Tax Reform & Its Impact on Commercial Real Estate

• 1031 Like-Kind Exchanges: Retained for real property, but repealed for personal property.
• Carried Interest: Requires a three-year holding period to qualify for capital gains treatment of carried interest.
• Pass-through income: Eligible for a 20% deduction, IF it is a “non-personal service business.” “Personal service businesses” will likely include real estate, but there are still options for real estate professionals to take advantage of some or all of the new tax rules for pass-through income:
  • Business owners making less than $157,500 (single) or $315,000 (couples filing jointly) can take the 20% deduction, even from personal service businesses.
    • Above those income levels, the benefit of the 20% deduction phases out over an income range of $50,000 for singles and $100,000 for couples.
  • Non-personal service income above the threshold may see the deduction limited by the wage and capital limit exception.¹

¹This limits the deduction to the greater of 50% of the W-2 wages, or 25% of the W-2 wages plus 2.5% of the cost basis of the tangible depreciable property of the business at the end of the year.