DisasterPhysical Disaster and Economic Injury Loans

SMALL BUSINESS ADMINISTRATION

13 CFR Part 123

Disaster--Physical Disaster and Economic Injury Loans

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: The Small Business Administration (SBA) is revising on an

immediate basis its present prohibition on making economic injury

disaster loans available to small business concerns engaged in

investing in real or personal property (see 13 CFR 123.41(b)(2). This

regulation would provide a limited exception to that prohibition which

would permit economic injury assistance to be made available to

concerns investing in either commercial or residential real property

which is rented to a third party or intended to be rented to a third

party. This revision is being undertaken on an emergency basis and is

therefore published as a final rule.

DATES: This rule is effective March 9, 1994.

ADDRESSES: Comments should be submitted to Bernard Kulik, Assistant

Administrator for Disaster Assistance, U.S. Small Business

Administration, 409 Third Street SW., 8th Floor, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT:

Michael E. Deegan, Office of Disaster Assistance, (202) 205-6734.

SUPPLEMENTARY INFORMATION: Pursuant to section 7(b)(2) of the Small

Business Act, 15 U.S.C. 636(b)(2), SBA is authorized to make disaster

loans available as it may determine to be necessary or appropriate to

any small business concern located in an area affected by a disaster,

if SBA determines that the concern has suffered a substantial economic

injury as a result of such disaster.

In implementing this statutory mandate, SBA has promulgated

regulations (see 13 CFR 123.40 et seq.), among which is 13 CFR

123.41(b)(2) which enumerates a number of types of business concerns

which are ineligible for economic injury assistance. Among such

concerns are those which invest in commercial or residential real

property that is to be held for the purpose of obtaining rental income.

These types of businesses have historically been ruled ineligible for

SBA's business loan and economic injury disaster loan assistance

because they have been viewed, as a matter of policy, to be passive

investment businesses not involved in the operation of a going

commercial business activity.

SBA has determined that this restriction on the eligibility of

businesses engaged in the rental of real property is no longer

warranted for economic injury disaster assistance because of the unique

practical implications on real estate rental that flow from disaster

situations, notwithstanding the passive nature of the business activity

of such concerns. In this regard, disasters commonly damage a

significant share of the rental real properties in a disaster area,

causing shortages of available residential and commercial rental space.

At the same time, disaster victims (including homeowners, renters and

businesses) displaced from their own damaged properties are forced to

hastily seek rental of suitable alternatives. They enter a market with

a suddenly constricted supply of rental properties due to the disaster.

The combination of these factors often leads owners of vacant,

undamaged rental property to increase rents, which in turn forces

residential and commercial renters to pay rental rates above what their

budgets can reasonably afford.

Under SBA's physical disaster assistance program, the owners of

disaster damaged rental real property can borrow the amount of their

uninsured losses from SBA to help fund repairs of physical damages.

However, until the repairs are completed and the tenants return, the

landlords experience a period of negative cash flow while mortgage

payments and operating expenses continue without rental receipts. Many

landlords, especially the small ones, cannot maintain solvency through

such a period.

Notwithstanding these circumstances, unlike most other businesses,

such landlords are not presently eligible for SBA economic injury

disaster loans, which are intended by law to help small businesses meet

ordinary and necessary operating expenses and pay fixed debts until

resumption of normal operations after a disaster. Because the inability

of small landlords to obtain economic injury assistance from SBA poses

a direct obstacle to their ability to return their disaster damaged

rental units to the residential and commercial market, it also

compounds the difficulties faced by renters in the aftermath of

disasters. This practical reality along with the acute needs within a

disaster area for an adequate supply of affordable residential and

commercial rental property justify extending economic injury

eligibility to rental real property owners.

This amendment provides a limited exception to the present rule

which prohibits economic injury disaster assistance to all concerns

investing in real property. It does not affect the provisions of SBA's

present regulations (13 CFR 120.102-8) which prohibit eligibility for

business loan assistance for such businesses and, it does not permit

economic injury disaster assistance for businesses which merely invest

in real property for sale and investment. Only concerns which invest in

real property for rental purposes will be eligible for SBA economic

injury disaster assistance under this revision. Those who cannot

demonstrate that their property was rented or intended to be rented at

the time of the occurrence of the disaster will continue to be

ineligible for the assistance. In reviewing applications for economic

injury assistance for rental property owners, the remaining SBA

eligibility and credit standards that currently apply to all other

small businesses eligible for an economic injury disaster loan will be

used.

SBA is establishing this limited exception effective upon

publication pursuant to 13 CFR 123.1(b) which authorizes emergency

changes in the regulations governing its disaster assistance program,

and 5 U.S.C. 553(b)(B) which permits publication of regulations in

final form without notice of comment when an agency finds that good

cause exists for publication in final form on an emergency basis, and

that notice and comment is impracticable, unnecessary or contrary to

the public interest. In this regard, the public interest in seeing to

it that the new limitations are effective as to the recent California

earthquake disaster makes the utilization of notice and comment

rulemaking impracticable.

Compliance With Executive Orders 12866, 12612, and 12778; Regulatory

Flexibility Act, 5 U.S.C. 601, et seq.; and the Paperwork Reduction

Act, 44 U.S.C. ch. 35

For purposes of Executive Order 12866, SBA certifies that this rule

will not have an annual economic effect in excess of $100 million,

result in a major increase in costs for individuals or governments, or

have a significant adverse effect on competition and, therefore, would

not constitute a major or significant rule. SBA has made this

determination based upon the fact that even though this rule would

potentially increase the universe of eligible applicants for economic

injury disaster assistance, it would not, in and of itself, increase

the gross amount of disaster assistance available to those who are

eligible. Individual applicants will still be governed by all other

eligibility requirements for SBA economic injury disaster assistance

and will remain eligible for assistance to the extent of verifiable

loss as present regulations provide.

For purposes of Executive Order 12612, SBA certifies that this rule

will not have federalism implications warranting the preparation of a

Federalism assessment.

For purposes of Executive Order 12778, SBA certifies that this rule

is drafted, to the extent practicable, in accordance with the standards

set forth in section 2 of that Order.

For purposes of the Regulatory Flexibility Act, SBA certifies that

this rule will not have a significant economic effect on a substantial

number of small entities for the same reason that it is not a major or

significant rule.

For purposes of the Paperwork Reduction Act, SBA certifies that

this rule will not impose a new recordkeeping or reporting requirement.

List of Subjects in 13 CFR Part 123

Disaster, Physical disaster and economic injury loans.

For the reasons set out above, pursuant to sections 5(b)(6) and

7(b)(2) of the Small Business Act, title 13, part 123 of the Code of

Federal Regulations, is amended to read as follows:

1. The authority citation for part 123 continues to read as

follows:

Authority: Sec. 5(b)(6), 7(b), (c), (f) of the Small Business

Act, 15 U.S.C. 634(b)(6), 636 (b), (c,) (f); Pub. L. 102-395, 106

Stat. 1828, 1864; and Pub. L. 103-75, 107 Stat. 739.

2. Section 123.41(b)(2)(ix) is revised to read as follows:

Sec. 123.41 General provisions.

* * * * *

(b) * * *

(2) * * * (ix) concerns investing in property--see Sec. 120.102-8;

Provided however, that for any disaster occurring on or after January

1, 1994, concerns investing in real property that was being held for

rental at the time of the occurrence of the disaster are eligible to

apply for these loans.

* * * * *

Dated: February 22, 1994.

Erskine B. Bowles,

Administrator.

[FR Doc. 94-5433 Filed 3-8-94; 8:45 am]

BILLING CODE 8025-01-M