Small Business Bill, Accounting Change Could Pack Wallop

WASHINGTON, DC-Two separate but related events are nearing their respective finish lines, with the end result being a greater impact on commercial real estate than some observers might have expected.

One event is the passage of the small business legislation in Congress last week, which was signed by President Barack Obama on Monday. The Small Business Jobs Act is intended to make credit available to small and mid-sized businesses as well as extend tax breaks for the purchase of capital goods. It includes a $30-billion fund run by the Treasury Department, which is meant to boost lending among community banks and small business.

The act also eliminates fees charged for Small Business Administration loans--namely SBA 7(a) and 504 loans through the end of the year. It also increases SBA 7(a) loan limits from $2 million to $5 million; SBA 504 loans from $1.5 million to $5.5 million; and SBA 7(a) Express Loans from $350,000 to $1 million.

With the elimination of these fees and loan increases, now could be a great time for a business to purchase a building, says Mary Navarro, senior executive vice president and director of retail and business banking for Huntington, an SBA lender.

Then there is FASB 13, which is poised to dramatically change how leases are accounted for on the balance sheet. “The FASB 13 changes include a requirement that leases show up as debt on balance sheets, so small businesses may figure that it makes sense to buy their real estate rather than lease space,” explains Howard Peskoe, a commercial real estate attorney with Herrick, Feinstein, who represents commercial property owners and lenders in finance, sales and leasing deals. “Small businesses might find it at least as attractive to have mortgage debt on their balance sheets as to have re-characterized lease payments,” he tells GlobeSt.com. “Plus, they’d have the other obvious benefits of ownership rather than tenancy.”

For a variety of reasons, the pending legislation probably will not directly influence the commercial real estate activities of small business, such as their buying the property they occupy, he continues. “But the legislation, in combination with proposed changes to the accounting rule FASB 13, might spur the purchase of commercial property by small businesses,” he says.

"The availability of added capital funds to banks may roughly coincide chronologically with the FASB changes and, as important, businesses’ recognition of those changes,” Peskoe says. “If that happens, the added rationale for small businesses buying real estate may be bolstered by the availability of more money to borrow. The accounting rule changes may not become final until 2012 or even 2013, so the confluence of these two events may be delayed.”

As a discrete matter, the lending-stimulus bill probably will not trigger a spate of purchases of commercial real estate by small businesses, Peskoe says, as the bill does not obligate banks to lend. That, of course, was a complaint heard about TARP as well. As Peskoe notes, though, it is difficult for regulations to require banks to step up their in lending because that would involve regulators getting too involved in businesses’ day-to-day operations and credit decisions. Also, real estate entrepreneurs are seldom targeted as borrowers of small business lenders--and even if small-business lending picks up as a result of the availability of more capital, there’s no assurance that the businesses will use the borrowed money to buy their premises. “But these two seemingly unrelated phenomena--taken together--very well could spur small businesses to buy rather than lease,” Peskoe concludes.