I bet most SBA lenders can cite the size standards by heart. And I’ll bet if we wake up most savvy lenders in the middle of the night, some will be muttering “… maximum tangible net worth of no more than $15 million …” or “… average net income after federal income taxes of $5 million or less.” Still I wonder: How many people woke up on October 1 and rushed to check out the annual publication of Labor Surplus Areas? I resisted temptation and waited until October 4.
Every year the Department of Labor publishes an updated list of Labor Surplus Areas on October 1. This list enumerates whole counties, cities and parts of counties where the average annual unemployment rate during the previous two calendar years is 20% or more above the average of all states and Puerto Rico during the same 24-month period. I don’t know what implications this has for other federal agencies. But it’s important for SBA loans because it affects size standards, smashing the $15 million and $5 million ceilings in many cases.
How Could I Wait So Long? Even Four Days? Usually there are very few changes to this list. Not so this year. Due to the pandemic, the list has grown to something like 2,000 locations identified as Labor Surplus Areas. As a result, there are significant changes and some surprises on this year’s list. So don’t take for granted that a certain state, county or city has low or high unemployment. For example, my former state, Arizona, has a reputation for a good economy. Yet 12 of its 15 counties are on the list, as are Phoenix and Tucson both.
How LSA Changes Affect SBA Lending. Businesses in Labor Surplus Areas get a 25% hike in size standards for both 7(a) and 504. Let’s say a business will be spending all of its SBA loan proceeds in Labor Surplus Areas:
- Industry size standards (whether the number of employees or annual receipts) are increased by 25%.
- Alternative size standards are also increased by 25%, to a maximum tangible net worth of no more than$18.75 million; and average net income after federal income taxes (excluding any carry-over losses) for the two full fiscal years before the application date of not more than $6.25 million. (SOP 50 10 6 Part 2. Section A. Chapter 1. D. 1. c. 13 CFR § 121.301(e) pg. 119)
Do You Have an LSA in Your CDC’s Area of Operations? If so, your portfolio average gets a kicker as well. Instead of your portfolio maintaining an average of one Job Opportunity created or retained for every $75,000 SBA guaranty, you’re required to maintain a Job Opportunity Average of one for every $85,000. The SOP allows you to separate loans in an LSA from the rest of your portfolio in calculating that average. Depending on your portfolio, it might be worth splitting. (SOP 50 10 6 Part 2. Section C. Chapter 1. A. 2. b. pg. 455)
By the way, business expansion is an LSA Community Development objective for 504 and Community Advantage loans. So even though the project is in a Labor Surplus Area, it needn’t create new jobs.
Check Out the List. Don’t Wait Any Longer. We’ll email you the latest list of Labor Surplus Areas ASAP. Just send me an email!
And as always, I’m happy to hear from you. But please don’t wake me up. I can’t guarantee what I’ll mumble!
Senior Associate, CDC/504 Program