Item 7.1, September 10, 2002 SUBJECT: AMENDMENT TO SMALL BUSINESS LOAN PROGRAM TO ASSIST DOWNTOWN AND NEIGHBORHOOD BUSINESS DISTRICTS BUILDING OWNERS AND TENANTS RECOMMENDATION It is recommended that the City Council and Agency Board adopt resolutions approving an amendment to the Small Business Loan Program to make the Small Business Loan Program guidelines consistent with the federally established Small Business Association guidelines. BACKGROUND On June 25, 2002, the Board adopted the Small Business Loan Program (SBLP) in order to provide reduced-rate financing targeted to retail businesses in the downtown and Neighborhood Business Districts (NBDs) experiencing decreasing sales and to help stabilize and grow small businesses. The SBLP provides loans up to $40,000, at 3%-interest, to retail small businesses located in the Downtown Core or in an existing Neighborhood Business District (Alum Rock Ave., East Santa Clara St., Japantown, Monterey Corridor, Story Rd., The Alameda, and West San Carlos St.). The SBLP may be used for normal business uses, including the following: purchasing inventory, equipment, physical improvements, repayment of credit card debt or other high interest debt that is directly attributable to the business (up to 50% of the loan amount), advertising or promotional campaigns, and other reasonable expenses. The SBLP is a joint project between the Office of Economic Development (OED) and Redevelopment Agency. The program is being administered by the OED and is funded by the Agency in the amount of $2 million. Current SBLP guidelines required that small retail businesses have net revenues of less than $1.25 million per year to be eligible to apply. Based on past loan application experience under other OED and SJRA programs, staff felt that this limit would encompass most, if not all, small businesses seeking assistance from the program. However, the initial group of applications received by OED included a few small businesses that exceeded that criterion. OED staff reviewed the small business size standards established by the U.S. Small Business Administration
(SBA) for its programs, by type of business based on total annual receipts and/or number of employees, and determined that these standards would be more appropriate as criteria for the SBLP. As macroeconomic conditions change in the market place, the SBA periodically adjusts its criteria and, accordingly, the SBLP criteria would be synchronized with SBA standards. ANALYSIS The Office of Economic Development has received a number of inquiries for the SBLP. Most of these inquiries have come from family businesses that have proven to be an integral part of San Jose s retail fabric. The $1.25 million threshold does not provide for the full range of retail small businesses, restricting a few businesses primarily restaurants from qualifying for the SBLP. Despite their apparently high revenues, they are often precluded from qualifying for other traditional or commercial loans and the SBLP is, in many cases, the only financing available to them, particularly if they are losing money during this economic downtown. Agency and OED staffs have evaluated various methods to accommodate these small businesses that have annual revenues above the existing SBLP guidelines. In order to ensure that loans are available to a large pool of small businesses and those most in need of assistance during the economic downturn, it is recommended that the SBLP guidelines be modified to reference the federallyestablished Small Business Association guidelines to define small business total annual receipt parameters. Using the SBA guidelines for total annual receipts will ensure that the City s SBLP receipt criteria are consistent with the small business standards used by most local, state, and federal programs. The revised program, with these changes, is attached. At this time, using the SBA guidelines the maximum total annual receipts is $6 million for most SBLP applicants such as florist, book and clothing stores, as well as restaurants. As such, the new guidelines address the existing criteria limitations by expanding the program criteria to encompass a larger pool of retail small businesses. COORDINATION This report has been coordinated with the Office of Economic Development and the Agency s General Counsel.
FISCAL IMPACT No financial impact. // ss // // ss // DEL BORGSDORF SUSAN F. SHICK City Manager Executive Director Attachments (See Below)
ATTACHMENT # 1 THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE SAN JOSE OFFICE OF ECONOMIC DEVELOPMENT Small Business Assistance Loan Program The San Jose Office of Economic Development and the San Jose Redevelopment Agency propose a $2 million Loan Fund to provide 3% financing up to $40,000 per loan with flexible terms for retail businesses located in the Downtown Core or in Neighborhood Business Districts that have experienced declining or stagnant sales during the last year. The program intends to fill a financing gap, not currently available from other governmental or private sector loan programs, for small businesses to stabilize and/or to undertake expansion plans in a more difficult economic environment. The program is being funded by the San Jose Redevelopment Agency and administered by the San Jose Office of Economic Development. This program is an extension of their existing Development Enhancement Special Fund, but with more flexible underwriting criteria. Loans are reviewed and approved by the Fund Advisory Board, which is comprised of banking, small business, community and city representatives. Technical Assistance will be provided to any applicant who requests it. The Entrepreneurial Center, the Hispanic Chamber of Commerce, the Vietnamese Chamber of Commerce or the Office of Economic Development staff will provide technical assistance. Eligibility Criteria Any retail small business operating in the Downtown Core or a Neighborhood Business District (West San Carlos, Story Road, Alum Rock, East Santa Clara, Monterey Corridor, The Alameda, Japantown) is eligible to apply. Only those businesses that have been in operation for a minimum of one-year in an eligible area can apply. A business must be able to show that it is: Currently breaking even; or Profitable; or Were profitable for a majority of the last three years and having a net loss for no more than the last six months.
An applicant must either be a tenant, a subtenant, or the owner of the space they are in. An applicant must meet the Small Business Administration (SBA) definition of a small business based on total annual receipts or number of employees (excerpt attached). No more than one application will be permitted for any given business owner. An applicant must have a written plan on how they intend to stabilize and/or grow their revenue. If an applicant is applying for more than one loan from OED, only one application will be required. The Fund Advisory Board and OED will review and (if approved) underwrite the loans as one assistance package whenever possible. Applicants should contact OED staff before submitting their SBLP application to discuss whether they may be eligible for other loans or small business assistance. Loan Terms Loans can be for between $1,000 and $40,000 and will carry an interest rate of 3% simple interest. Loans can be for between 2 and 10-year terms. The first two years may be interest only, at the discretion of the Fund Advisory Board. The loan will become due upon the business ceasing to operate in the City of San Jose, any violation of the loan agreement, or at the end of its term. Loan payments will be due at the first of each month, if payments are not received by the 10 th of the month a late charge of 5% will be added to that monthly payment. The business may be asked to provide collateral of at least 50% of the loan amount. The collateral may be personal or real property. The SBLP loan will take second or third position to any private existing lien. There are no fees or points for this loan. If collateral is not available, the Fund Advisory Board may approve the loan without collateral. Applicants must submit: Application; 1-4 page plan that describes the process for achieving business stabilization and/or growth (must include current and anticipated future revenue and expenses); and A budget for utilization of the SBLP funds. Applicants must also submit a copy of their lease/sublease/ownership documentation and most recent IRS tax returns.
Eligible Uses for Loan Proceeds Loan proceeds can be used for: Purchasing inventory and equipment; Physical improvements to a retail store; Repayment of credit card or other high interest debt that is directly attributable to the business (up to 50% of the loan amount); Advertising or promotional campaigns; Overhead, including staff salaries and rent (not to exceed 50% of the loan amount); Other reasonable costs that enable the business to meet its articulated growth goals. Revised: 9/10/02
ATTACHMENT # 2 Small Business Size Standards Matched to North American Industry Classification System (NAICS) Effective July 1, 2002 Sectors 44-45 - Retail Trade (Not applicable to Government procurement of supplies. The nonmanufacturer size standard of 500 employees shall be used for purposes of Government procurement of supplies.) Subsector 441 - Motor Vehicle and Parts Dealers 441110 New Car Dealers $24.5 441120 Used Car Dealers $19.5 441210 Recreational Vehicle Dealers $6.0 441221 Motorcycle Dealers $6.0 441222 Boat Dealers $6.0 441229 All Other Motor Vehicle Dealers $6.0 Except Aircraft Dealers, Retail $8.5 441310 Automotive Parts and Accessories Stores $6.0 441320 Tire Dealers $6.0 Subsector 442 - Furniture and Home Furnishings Stores 442110 Furniture Stores $6.0 442210 Floor Covering Stores $6.0 442291 Window Treatment Stores $6.0 442299 All Other Home Furnishings Stores $6.0 Subsector 443 - Electronics and Appliance Stores 443111 Household Appliance Stores $7.5 443112 Radio, Television and Other Electronics Stores $7.5 443120 Computer and Software Stores $7.5 443130 Camera and Photographic Supplies Stores $6.0 Subsector 444 - Building Material and Garden Equipment and Supplies Dealers 444110 Home Centers $6.0 444120 Paint and Wallpaper Stores $6.0
444130 Hardware Stores $6.0 444190 Other Building Material Dealers $6.0 444210 Outdoor Power Equipment Stores $6.0 444220 Nursery and Garden Centers $6.0 Subsector 445 - Food and Beverage Stores 445110 Supermarkets and Other Grocery (except Convenience) Stores $23.0 445120 Convenience Stores $23.0 445210 Meat Markets $6.0 445220 Fish and Seafood Markets $6.0 445230 Fruit and Vegetable Markets $6.0 445291 Baked Goods Stores $6.0 445292 Confectionery and Nut Stores $6.0 445299 All Other Specialty Food Stores $6.0 445310 Beer, Wine and Liquor Stores $6.0 Subsector 446 - Health and Personal Care Stores 446110 Pharmacies and Drug Stores $6.0 446120 Cosmetics, Beauty Supplies and Perfume Stores $6.0 446130 Optical Goods Stores $6.0 446191 Food (Health) Supplement Stores $6.0 446199 All Other Health and Personal Care Stores $6.0 Subsector 447 - Gasoline Stations 447110 Gasoline Stations with Convenience Stores $23.0 447190 Other Gasoline Stations $7.5 Subsector 448 - Clothing and Clothing Accessories Stores 448110 Men's Clothing Stores $7.5 448120 Women's Clothing Stores $7.5 448130 Children's and Infants' Clothing Stores $6.0 448140 Family Clothing Stores $7.5 448150 Clothing Accessories Stores $6.0 448190 Other Clothing Stores $6.0 448210 Shoe Stores $7.5 448310 Jewelry Stores $6.0 448320 Luggage and Leather Goods Stores $6.0 Subsector 451 - Sporting Good, Hobby, Book and Music Stores
451110 Sporting Goods Stores $6.0 451120 Hobby, Toy and Game Stores $6.0 451130 Sewing, Needlework and Piece Goods Stores $6.0 451140 Musical Instrument and Supplies Stores $6.0 451211 Book Stores $6.0 451212 News Dealers and Newsstands $6.0 451220 Prerecorded Tape, Compact Disc and Record Stores $6.0 Subsector 452 - General Merchandise Stores 452110 Department Stores $23.0 452910 Warehouse Clubs and Superstores $23.0 452990 All Other General Merchandise Stores $9.5 Subsector 453 - Miscellaneous Store Retailers 453110 Florists $6.0 453210 Office Supplies and Stationery Stores $6.0 453220 Gift, Novelty and Souvenir Stores $6.0 453310 Used Merchandise Stores $6.0 453910 Pet and Pet Supplies Stores $6.0 453920 Art Dealers $6.0 453930 Manufactured (Mobile) Home Dealers $11.0 453991 Tobacco Stores $6.0 453998 All Other Miscellaneous Store Retailers (except Tobacco Stores) $6.0 454110 Electronic Shopping and Mail-Order Houses $21.0 454210 Vending Machine Operators $6.0 454311 Heating Oil Dealers $10.5 454312 Liquefied Petroleum Gas (Bottled Gas) Dealers $6.0 454319 Other Fuel Dealers $6.0 454390 Other Direct Selling Establishments $6.0