SBA Lending Matters Newsletter
A Word from Arne

As we prepare for the upcoming ICBA National Convention, all of us at Holtmeyer & Monson are looking   forward to seeing you in San Diego.  But before we go, we want to advise you of several “loose end” topics that you should be aware of now.  Discussions of the following items are top of mind for those of us in small business lending.

SBA Budget.  The SBA FY 2012 budget request has been established at $985 million. Excluding the supplemental appropriations previously funded, next year’s funding request is $161 million higher than the last SBA budget that was issued for 2009. The current budget request includes adequate funding for the most widely used 7(a) Loan Program and the 504 Loan Refinancing Program, with reductions in funding for the Microloan Program and Small Business Development Centers.

Extension of Jobs Act Provisions.  We are still receiving inquiries about an extension of the Small Business Jobs Act of 2010. Those provisions expired on March 4th, and will not be extended. The SBA is has resumed its normal operating practices and program features, offering standard guaranty fees and percentages. These still represent a sound opportunity for lenders, and more than worthy of consideration.

Dealer Floor Plan Financing Program.  As of February 8, 2011, this pilot program has been re-launched to encourage SBA lenders to extend lines of credit to eligible dealers of new and used automobiles, motorcycles, boats (including boat trailers), RVs, and manufactured housing (mobile homes). Covered loan sizes range from $500,000 to $5,000,000 and standard guaranty percentages apply.  The SBA will guarantee 75% on floor plan lines of credit when the lender advances no more than 100% of the cost (invoiced) for new inventory. For used inventory, advances can be as high as 100% of the industry-based wholesale book value, or inventory cost, whichever is less.

We will continue to keep you updated about the latest developments in small business lending. This is what we do for more than 400 clients, and we’re pleased to share the information.

If you would like to take advantage of opportunities now available through the SBA, without adding staff and specialists for small business lending, consider outsourcing these functions to a qualified Lender Service Provider. Holtmeyer & Monson – endorsed by the Independent Community Bankers of America – is happy to fill this need for your institution.

Featured Article

Structuring a Partner Buyout as a Stock Redemption: Potential Tax Consequences Arising from the New Change of Ownership Rules
By Jessica L. Conn, Esq., Starfield & Smith, P.C.
http://www.starfieldsmith.com

Under the SOP 50 10 5(B), SBA permitted a change of ownership through a stock purchase by individuals, provided that the individuals and the entity being acquired were co-obligors on the loan. The SOP 50 10 5(C), which became effective October 1, 2010, changed this rule, and now only requires the business being acquired to be a borrower when financing a change of ownership through a stock transfer. No formal guidance has been provided by SBA with respect to the intent of this change. However, senior SBA officials have advised that this change means that a stock purchase by individuals can no longer be financed under the SBA loan program. A change of ownership via stock purchase is frequently utilized by shareholders that want to purchase the stock of another shareholder. In order to comply with SBA's new regulations, a borrower may alternatively structure a partner buyout as a stock redemption, however, in doing so, both lenders and borrowers should be mindful of the potential tax consequences stemming from this structure change.

Let's assume that Shareholder A and Shareholder B each own 50 shares of Company X stock. Shareholder B has entered into an agreement of sale to purchase Shareholder A's 50 shares of Company X stock, and is currently seeking financing for the transaction. In order to comply with the new SBA regulations, Shareholder B assigns the purchase contract to Company X, thereby changing the structure of the deal from a stock purchase to a stock redemption. If Shareholder B had purchased Shareholder A's stock, Shareholder A would recognize a gain on that sale. The gain would be taxed as a capital gain. Assuming Shareholder A held the stock for more than one year and is in an average tax bracket, this long-term capital gain would be taxed at a rate of 15% at the federal level. If the transaction is instead structured as a stock redemption, Corporation X would purchase Shareholder A's 50 shares of stock. Depending on the circumstances, for Shareholder A, the stock redemption can either be taxed as an "exchange" (which would, like the example above, result in capital gains treatment) or as a "distribution" (which would result in ordinary income treatment). The tax rate for ordinary income varies, but for most, ordinary income is currently taxed at a rate of 25-35% at the federal level.

There are several different scenarios under which a stock redemption will be treated as an exchange. One such scenario is when the corporation redeems 100% of the seller's stock in the corporation. Since SBA requires that 100% of a seller's interest be purchased in order for the change of ownership to be eligible for financing, it may be relatively easy to meet the requirements for exchange treatment of the transaction. However, certain types of transactions may require additional professional guidance on the tax ramifications. One such transaction is intra-family transfers. Assume for a minute that Shareholder A is the father of Shareholder B. Under certain circumstances, Shareholder A may be treated by the IRS as indirectly owning the stock of Shareholder B. If the IRS so attributes Shareholder B's stock to Shareholder A after the redemption has taken place, then the redemption may not be treated as an exchange, resulting in adverse tax consequences. Therefore, in this type of scenario, it is very important for a prospective borrower to seek guidance on structuring the transaction to ensure they meet the requirements to waive family attribution rules.

Another situation that can arise via a stock redemption deals with constructive dividends. Under Revenue Ruling 69-608, if the assignment of the contract takes place at a time when Shareholder B has a "primary and unconditional obligation" to purchase the stock of Shareholder A, satisfaction of the obligation by the corporation would result in a constructive distribution to Shareholder B. In other words, the IRS views the benefit gained by Shareholder B in no longer needing to meet the obligation set forth in the purchase agreement as taxable; and the constructive dividend is taxed at ordinary income rates. Each scenario must be assessed on a case by case basis, and it is best for a prospective borrower to discuss the purchase contract with a tax professional before assigning it to a corporation because there may be other methods of effectuating the transfer without incurring the constructive dividend tax.

It is possible to structure a stock redemption so that the tax consequences are similar to a stock purchase. However, it is imperative for a prospective borrower to consult with a tax professional before making structural changes to a transaction to get the best possible tax consequences for both the individuals and the corporation.

For more information regarding financing changes of ownership through stock transfers and the attendant tax consequences thereof, contact Jessica at [email protected].

IRS Circular 230 Disclosure: This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding federal, state or local tax penalties, or for promoting, marketing or recommending to another party any transaction or matter addressed herein.


Regulatory Corner

SBA Loan Queues
The SBA closed the Loan Queue effective March 4, 2001. Any loans remaining in the Queue should be removed and resubmitted as regular SBA 7(a) and 504 loan applications. The revised applications will be subject to lower guaranty levels and standard fees.  Holtmeyer & Monson will be happy to handle the submission process for our clients.

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SBA Hot Topic

Once a loan has been submitted to SBA as a fixed rate loan, it cannot be changed to a variable rate instrument. The same holds true for a variable rate loan; a variable rate loan cannot be changed to a fixed rate loan. However, this does not preclude the lender from “fixing” the rate on a variable rate loan. The rate can be “fixed’, but the credit is still considered to be a variable rate loan with a modified adjustment period. The loan must comply with the maximum rate under the variable rate rule at the time of origination.

 

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