Committee on Small Business and Entrepreneurship
United States Senate
S. 3442 – “Success Act”
November 29, 2012
Written Testimony
Of
Scott Gardiner
Executive Vice President
Granite State Economic Development Corporation
Introduction
Madame Chair, Ranking Member Olympia J. Snowe and members of the committee thank you for inviting me here today to provide my testimony regarding the SBA 504 Loan Program and specifically the impact of the SBA 504 Refinancing Program on small business companies. My name is Scott Gardiner and I have been involved with the SBA 504 Loan Program since 1988. Over the last 24 years I have been active in management, marketing, loan structuring and credit underwriting. Currently, I am the Executive Vice President of Granite State Economic Development Corporation which does business statewide in New Hampshire, Vermont, Maine and Massachusetts. We are the region’s leading SBA 504 Certified Development Company and currently, the nation’s 4th most active lender. In FYE 12, we approved over 270 SBA 504 loans totaling $145 million.
Our Certified Development Company
Granite State was originally certified in 1982 in three New Hampshire counties and expanded statewide in 1987. In 2003, when SBA regulatory changes created Local Economic Areas (LEA) and statewide certifications, Granite State Economic Development Corporation (GSDC) subsequently expanded into Maine, Massachusetts and Vermont. Since 2003, Granite State has become the region’s largest and fastest growing Certified Development Company and has been the most active CDC in each of the four states in our area of operations. As in New Hampshire, we have local offices with professional staff in Maine, Massachusetts and Vermont.
Our Local 504 Loan Portfolio
Granite State Economic Development Corporation like the other 250 CDC’s working on a local, regional or statewide basis has assisted thousands of small businesses in accessing the capital they need to expand and create jobs. Since 1982, we have provided 504 loan approvals to over 3,500 companies for $1.4 billion in 504 debentures while participating banks have provided an additional $2.1 billion as the first mortgage/first secured lender. On a portfolio-wide basis, Granite State’s assisted companies have created and retained approximately 20,000 jobs. On a per capita basis, we have been the most active CDC in the country since 1992 and we continue to be New England’s most active 504 lender. Of the 15 active CDC’s in New England, Granite State accounts for 43% of the total 504 activity. Our portfolio consists of 96% existing businesses and 4% start-ups. Our portfolio companies come from nine major industry groups with the highest sector concentration in Service (26%), Hospitality (14%), Professional (13%) and Manufacturing (11%). Our active loan portfolio includes participation with over 50 banks. Each month we reach out to dozens of lenders, small businesses and economic development professionals to keep them informed about the benefits of the SBA 504 Loan Program.
The 504 Program is Working
Today, the 504 program is an important mechanism for providing fixed asset financing to the nation’s small business community. For FYE September 30 2012 the 504 Loan program assisted more than 9,500 small businesses by providing approximately $6.7 billion of SBA debenture loans while leveraging at least $8.5 billion in conventional bank loans. In FYE 2012, the 504 Loan Program experienced a 15.7% increase in the number of small business loan approval and a 27.8% increase in the amount of debenture funding accessed by expanding companies. Certified Development Companies are now economic development organizations that support growth in regions that range from a single county in one state to a multi-state region. Over the past 30 years our industry has matured and gained the trust of both SBA and Congress to implement and manage a multi-billion dollar industry. Each successive year, the CDC industry has proven that it can adhere to strict financial regulations while effectively delivering a powerful economic development program to our country’s businesses. Over the last 30 years Certified Development Companies have consistently met the challenging demands for continued loan growth while maintaining professional management practices. In return, the SBA has given CDC’s more authority to process, approve, close and service small business loans.
504 Loan Refinancing Program
SBA’s traditional 504 loan program is a long term financing tool designed to encourage economic development within a community. A 504 loan provides a small business with long term, fixed-rate financing to acquire major fixed assets for expansion or modernization. Typically, a 504 project includes three elements: a bank loan covering up to 50 percent of the project cost; a SBA 504 loan from a Certified Development Company (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost; and a contribution of at least 10 percent equity from the small business owner.
In February 2011 under the Small Business Jobs Act of 2010, the SBA implemented a temporary program allowing small businesses to refinance eligible fixed assets in its 504 program without the requirement of an expansion. This program provided small businesses the opportunity to lock in long-term stable financing, and finance eligible business expenses as well as protect jobs and hire additional workers. This temporary program expired on September 27, 2012. Congress authorized SBA to approve up to $15 billion in loans under this program ($7.5 billion in both fiscal year 2011 and 2012). Together with the first mortgage, this temporary program was intended to provide up to $33.8 billion of total project financing. Additional fees were charged to the borrower to cover the cost of this refinancing program and as a result no subsidy to the 504 Program was needed. SBA continued to perform full and thorough underwriting on all refinancing applications (i.e., there were no “delegated” lenders). The new refinancing loan was structured like SBA’s traditional 504, with borrowers committing at least 10 percent equity and working with third party lending institutions and SBA approved Certified Development Companies in the standard 50 percent/40 percent split. A key feature of the new program was that it did not require an expansion of the business in order to qualify. Borrowers were able to refinance up to 90 percent of the current appraised property value and use the funds to pay off business related debt or other eligible business expenses. Prior to implementation of the program, market research showed that a large percentage of commercial mortgages outstanding were set to mature within a couple of years, particularly those held by community banks. In addition, as real estate values declined even small businesses that were performing well and making their payments on time had a hard time refinancing these loans and often needed to restructure their debt. In today’s reality of more stringent banking regulations, many performing loans continue to be declined for refinancing. This is not because these borrowers are missing payments or need a bailout; it is simply caused by the drop in commercial real estate values and the negative impact that drop has had on bank’s loan to value ratio requirements. In the end, the ability to offer the 504 loan Refinance Program to these performing borrowers was often the only option available to these businesses. Further, this option provided lenders an opportunity to help their borrowers stay in business, maintain the jobs and keep a performing loan on the bank’s books. The Small Business Administration’s SBA 504 Refinancing Program created a unique and time driven opportunity to refinance owner occupied commercial real estate and capital equipment with long term fixed rate financing along with the ability to “cash out” equity to address other liabilities and projected working capital needs. This program provided SBA with an opportunity to assist businesses to improve cash flow and receive new long term fixed rates on their existing commercial real estate. It also provided the bank with the ability to reduce its commercial real estate loan concentration.
Merrimack Building Supply, Inc. was established by William Donegan in 1985 and has locations in Merrimack, NH, Medway, MA and Berlin, CT. Mr. Donegan had a 7 year relationship with large commercial bank, however, as a result of the recession, like many building supply companies, sales and earnings declined and the bank decided to exit the industry and demanded Merrimack Building Supply’s $1,000,000 Line of Credit be paid off. Merrimack Building Supply never missed a payment and all trends in historical financial performance indicate the business will reach pre-recession levels in the next two years. This is a strong viable business with experienced management that employs 45 people. The SBA 504 refinance loan program allowed Mr. Donegan to use the equity in the business related real estate in New Hampshire and Massachusetts to pay off the Line of Credit and amortize the loan payments on a 20 year schedule, resulting in significantly improved cash flow. This was facilitated with Pentucket Bank in Haverhill, MA.
The SBA launched the 504 Refinance Program on February 17, 2011 and began accepting loan applications on February 28, 2011. The initial utilization of the program was relatively insignificant nationwide given the restrictive regulations that were initially set forth by the SBA. At first, the SBA restricted the program to small businesses whose mortgages were maturing within two years. As a result of that and other restrictions, only 307 SBA 504 refinance loan totaling $255 million were made nationwide during the first year of the program. The SBA modified those restrictions in June 2011. In October 2011, SBA further expanded the program parameters that encouraged more small businesses to take advantage of the longer term and the low interest rates offered through the program. To a large extent the modifications set forth in late October 2011 were not fully integrated into the small business lending community for several months. Granite State’s first hand experience based on loan approvals was that the banks and borrowers did not fully embraced the 504 refinance program until February/March of 2012. Through September 2012, nearly 2,700 small businesses have taken advantage of this refinancing opportunity by taking out $2.5 billion in 504 loans. In NH, GSDC provided 10 SBA 504 refinance loans for $9,400,000. In New England we approved a total of 41 loans for $33,600,000. On an annualized basis, during the months of August and September 2012 nationwide 504 refinancing accounted for approximately 30% of total 504 loan volume. Unfortunately, there were 396 refinance applications representing an aggregate value of over $424,000,000 that were left in the queue and not processed by SBA because of the termination of the program. It is clear to the CDC industry that the program was just gaining important traction in the small business community when the program ended on September 27, 2012. Given the continued tight market for conventional real estate mortgages, advocates of the 504 program have strongly urged Congress to extend the program. Granite State Economic Development Corporation supports the consideration of a one and a half year extension of the SBA 504 Refinancing Program.