Sec. 106.16 Effect of condemnation and casualty losses on insurance.

106.17 Lease guarantee Administration.

AUTHORITY: The provisions of this Part 106 issued under 72 Stat. 694, 79 Stat. 482, 483, 484; 15 U.S.C. 687, 692, 693, 694.

SOURCE: The provisions of this Part 106 contained in Rev. 1, 34 F.R. 14881, Sept. 27, 1969, unless otherwise noted.

GENERAL

§ 106.1 Statutory provisions.

TITLE IV-LEASE GUARANTEES
Authority of the Administration.

Section 401(a). The Administration may, whenever it determines such action to be necessary or desirable, and upon such terms and conditions as it may prescribe, guarantee the payment of rentals under leases of commercial and industrial property entered into by small business concerns to enable such concerns to obtain such leases. Any such guarantee may be made or effected either directly or in cooperation with any qualified surety company or other qualified company through a participation agreement with such company. The foregoing powers shall be subject, however, to the following restrictions and limitations:

(1) No guarantee shall be issued by the Administration (1) if a guarantee meeting with the requirements of the applicant is otherwise available on reasonable terms, and (ii) unless the Administration determines that there exists a reasonable expectation that the small business concern in behalf of which the guarantee is issued will perform the covenants and conditions of the lease.

(2) The Administration shall, to the greatest extent practicable, exercise the powers conferred by this section in cooperation with qualified surety or other companies on a participation basis.

(b) The Administration shall fix a uniform annual fee for its share of any guarantee under this section which shall be payable in advance at such time as may be prescribed by the Administrator. The amount of any such fee shall be determined in accordance with sound actuarial practices and procedures, to the extent practicable, but in no case shall such amount exceed, on the Administration's share of any guarantee made under this title, 21⁄2 per centum per annum of the minimum annual guaranteed rental payable under any guaranteed lease; provided that the Administration shall fix the lowest fee that experience under the program established hereby has shown to be justified. The Administration may also fix such uniform fees for the processing of applications for guarantees under this section as the Administrator determines are reasonable and necessary to pay the administrative expenses that are incurred in connection therewith.

(c) In connection with the guarantee of rentals under any lease pursuant to author

ity conferred by this section, the Administrator may require, in order to minimize the financial risk assumed under such guarantee

(1) That the lessee pay an amount not to exceed one-fourth of the minimum guaranteed annual rental required under the lease, which shall be held in escrow and shall be available (1) to meet rental charges accruing in any month for which the lessee is in default, or (ii) if no default occurs during the term of the lease, for application (with accrued interest) toward final payments of rental charges under the lease.

(2) That upon occurrence of a default under the lease, the lessor shall, as a condition precedent to enforcing any claim under the lease guarantee, utilize the entire period for which there are funds available in escrow for payment of rentals, in reasonably diligent efforts to eliminate or minimize losses, by releasing the commercial or industrial property covered by the lease to another qualified lessee, and no claim shall be made or paid under the guarantee until such effort has been made and such escrow funds have been exhausted.

(3) That any guarantor of the lease will become a successor of the lessor for the purpose of collecting from a lessee in default rentals which are in arrears and with respect to which the lessor has received payment under a guarantee made pursuant to this section, and

(4) Such other provisions, not inconsistent with the purposes of this title, as the Administrator may in his discretion require.

POWERS

Section 402. Without limiting the authority conferred upon the Administrator and the Administration by § 201 of this Act, the Administrator and the Administration shall have, in the performance of and with respect to the functions, powers, and duties conferred by this title, all the authority and be subject to the same conditions prescribed in section 5(b) of the Small Business Act with respect to loans, including the authority to execute subleases, assignments of lease, and new leases with any person, firm, organization, or other entity, in order to aid in the liquidation of obligations of the Administration hereunder.

FUND

Section 403 (a). There is hereby established a revolving fund for use by the Administration in carrying out the provisions of this title. Initial capital for such fund shall consist of not to exceed $5 million transferred from the fund established under section 4(c) of the Small Business Act: Provided, That the last sentence of such section 4 (c) shall not apply to any amounts so transferred. Into the fund established by this section there shall be deposited all receipts from the guarantee program authorized by this title. Moneys in such fund not needed for the payment of current operating expenses or for the payment of claims arising under such

program may be invested in bonds or other obligations of, or bonds or other obligations guaranteed as to principal and interest by the United States; except that moneys provided as initial capital for such fund shall be returned to the fund established by section 4(c) of the Small Business Act, in such amounts and at such times as the Administration determines to be appropriate, whenever the level of the fund herein established is sufficiently high to permit the return of such moneys without danger to the solvency of the program under this title.

(b) Section 201 of such Act is amended by striking out the third sentence and inserting in lieu thereof the following:

The powers conferred by this Act upon the Administration and upon the Administrator, with the exception of those conferred by titles IV and V hereof, shall be exercised through the Small Business Investment Division and through the Deputy Administrator appointed hereunder. The powers conferred by this Act upon the Administration and upon the Administrator by titles IV and V hereof shall be exercised through such division, section, or other personnel as the Administrator in his discretion shall determine.

(c) The table of contents of such Act is amended by inserting after the analysis of title III the following:

84-053-73

(c) "Small Business Concern" means a concern which would qualify as a small business under § 121.3-14 of this chapter.

(d) "Lease Guarantee" is an obligation evidenced by an insurance policy having a face value of the amount of rent assured to the lessor in the event of any default by the lessee in the covenants of the insured lease which results in vacant possession.

(e) A "qualified surety company or other qualified company" means a corporation which is authorized under applicable law to insure the rent provided for in leases of commercial or industrial property to small business concerns.

(f) "Commercial or industrial property" means any property, personal or real, to be leased and used, occupied or possessed by a small business concern in the conduct of its business.

(g) "Lessor" means a legal entity which is the owner of the right to occupancy or possession of the property to be leased. A lessor cannot be wholly owned or controlled by the lessee, a proprietary lessee's blood relatives, or a corporate lessee's officers, directors, or stockholders.

(h) "Lessee" means a small business concern which by the terms of the lease or proposed lease will acquire the right to use, occupy or possess the leased premises. A lessee cannot be wholly owned or controlled by the lessor or an individual lessor's blood relatives or a corporate lessor's officers, directors, or stockholders.

(i) "Lease" means the proposed or executed agreement between the lessor and the small business concern conveying the right to use and occupy or possess the leased premises for a term of years.

(j) "Rent" is the amount agreed upon by the lessor and the lessee for the right to use and occupy the leased premises and payable in fixed installments during the term of the lease.

(k) "Vacant Possession" means that the premises identified in the insured lease have been vacated by the lessee and restored to a condition which will permit immediate releasing by SBA or a participant for the purpose of mitigating loss.

(1) "Participation" means sharing the responsibility for the payment of the insured rent between SBA and a qualified surety company or other qualified company through a participation agreement.

(m) "Default" means any violation of the covenants and conditions of the lease

In order to be eligible for a lease guarantee, the lessee must:

(a) Qualify as a small business under § 121.3-14 of this chapter.

(b) Operate or propose operation of a business in conformity with Part 120— Loan Policy, of this chapter.

(c) Not be in unqualified possession of the premises under the lease prior to the issuance of a lease guarantee.

(d) Represent that without a lease guarantee on terms stipulated in the application, he is unable to obtain possession of the premises under the lease.

(e) Certify to SBA that a lease guarantee meeting the requirements of the lessee is not otherwise available on reasonable terms from private commercial

sources.

§ 106.5 Procedure for lease guarantee applications.

(a) Form of application. An application for rental insurance shall be made on the appropriate SBA form or on a similar form approved by SBA and shall include all pertinent information required in supporting schedules and forms. The application and supporting material shall be submitted to SBA in duplicate if the request is for an SBA insurance policy. If an application is submitted to a qualified surety company or other qualified company for its insurance policy and such company indicates its intention to submit the application to SBA for reinsurance, the application and supporting material shall be in triplicate.

(b) Place of filing. Application shall be made, if participation is not available, in the SBA Field Office serving the area in which the property is located. If participation is available, the application may be submitted to the participant which, in turn, may execute an application for reinsurance by SBA and transmit a copy of the application and supporting materials to the SBA Central Office.

charged by SBA for its policies of rental insurance.

(b) All other charges, such as processing fees, made by the company shall be reasonable.

(c) The distribution of the responsibility for payment of claims shall be as negotiated with the participating company. An example of distribution is as follows:

The company shall be responsible for paying all claims arising out of the insurance policy up to an amount equal to 12 times the average monthly rent insured and not less than 20 percent of any claim in excess of this amount.

(d) Policies of insurance issued by the participant shall be serviced by the participating company.

(e) A portion of the total premium shall be paid to SBA for its reinsurance; the premium payable to SBA will be determined by negotiation and shall depend upon the degree and extent of the participation, but shall not exceed 21⁄2 percent of the minimum guaranteed or insured rent payable under the lease.

§ 106.7 Insurance premium and amount of insurance.

(a) The premium for this insurance shall be due not later than the effective date of the rental insurance policy, shall be a single, nonrefundable premium and shall be paid in advance of issuance of the policy.

(b) The minimum term of a lease which SBA will guarantee directly is 10 years; the maximum term for such insurance is 20 years. The minimum term of a lease which SBA will guarantee in participation with a qualified company is 5 years; the maximum term for such insurance is 20 years.

(c) (1) The maximum amount of contract rent (exclusive of contingent overages) under leases to any small business concern or its affiliates for which a direct guarantee is issued by SBA shall not exceed the lesser of $15,000 in any month or $2,500,000 in the aggregate over the term guaranteed.

(2) The maximum amount of contract rent (exclusive of contingent overages) under two or more leases in any single property or group of contiguous properties for which direct guarantees are issued by SBA shall not exceed the lesser of $30,000 in any month or $5 million in the aggregate over the term guaranteed.

(3) SBA's share of the obligation to pay rental in participation with a quali

fied participating insurance company under leases to any small business concern or its affiliates shall not exceed the lesser of $15,000 in any month or $2,500,000 in the aggregate over the term guaranteed.

(4) The limitations of this subsection shall apply to all cases in which SBA has not, prior to April 1, 1971, issued a conditional commitment on an application for such a guarantee.

(d) SBA or a participant may insure all or a portion of the rent payable under a lease in installments. The outstanding amount of the policy may be increased by payment of additional premiums if the lease provides for an increase in the rent proportionate to increases in the costs of possession of the premises.

there exists a reasonable expectation that the small business applicant will perform the covenants and conditions of the lease or proposed lease.

(c) The terms, conditions, and covenants in a lease or proposed lease submitted to the insurer with an application shall be subject to recipient's approval. Insurer may require modifications to be made in the lease before issuance of the policy.

(d) If the insurer so determines because of the magnitude or complexity of a single application or if there are applications filed for three or more guarantees of leases in a single development or project, an independently prepared feasibility study provided by the applicant or applicants must be submitted.

§ 106.9 Required lease agreements.

Agreements shall be reached between the lessor and lessee and stated in the lease concerning:

(a) The division, if any, of any award in condemnation proceedings representing the value of the real estate, including fixtures and the value of the leasehold interest. The lessee must retain the rights, on the presumption that such rights exist under condemnation laws, to awards from or claims against the condemnor for any taking of the lessee's property (including any ownership in the leasehold improvements) for moving expenses and for damages for interruption of the lessee's business.

(b) The party or parties responsible for maintenance of hazard insurance and the payment of premiums therefor to insure real and personal property and whether such premiums on real property insurance are included in the minimum rent or are to be paid as additional minimum rent.

(c) The disposition of any hazard insurance proceeds and the party or parties responsible for reconstruction or repair of the premises and refurnishing or reequipping the building.

(d) The party or parties responsible for the payment of local taxes on the premises and whether such taxes are included in the minimum rent or are to be paid as additional minimum rent.

(e) That the lessee may not without the prior written consent of the lessor assign the lessee's interest in the lease or sublet the whole or any part of the premises.

(f) An equitable abatement of rent in the event all or any part of the premises are lost by casualty or condemnation proceedings. In lieu of such abatements, covenants by the tenant to obtain rent insurance or business interruption insurance will be considered.

§ 106.10 Minimizing the risk.

(a) Upon the effective date of the policy of rental insurance

(1) The lessee shall pay an amount not to exceed one-quarter of the average guaranteed annual rental into an escrow account with the insurer for the purpose of paying rental charges not in excess of the guaranteed minimum monthly rental accruing in any month in which the lessee is in default or,

(2) The lessor shall accept an insurance policy providing for a deduction of 3 months' rent due after the date of default as the amount of loss to be borne by the lessor.

(b) If an escrow account is established, it shall be accompanied by a written escrow agreement containing the following provisions:

(1) Simple interest at the rate of 4 percent per annum shall accrue to the escrowed fund from the date of deposit until the date of default.

(2) A default by the lessee in the covenants and conditions of the insured lease which is asserted by the lessor in a written demand for possession of the leased premises, shall forfeit all right and title of the lessee to the escrowed fund and interest accrued thereon.

(3) Upon such default and either before or after the lessee's actual possession is terminated, the insurer shall disburse to the lessor so much of the escrow as is necessary to pay claims for the guaranteed rent of rental charges accruing in any month in which the lessee is in default.

(4) If such default is cured by written agreement between the lessor and the lessee after the insurer has disbursed funds from the escrow to pay the lessor the guaranteed rent, the lessee shall, upon placing in this escrow an amount equivalent to the disbursed funds, be restored to all right, title, and interest in the escrowed fund as if such default had not occurred.

(5) If such default is not so cured and the lessee vacates because of eviction proceedings or the lessor's written demand, any portion of the escrowed

funds remaining unused after the property is rerented shall be retained by the insurer.

(6) If no such default occurs during the term of the insurance policy, the insurer, upon written request of the lessee, shall disburse the funds to the lessor for application toward the payment of the final rental charges under said lease.

(7) If, prior to the expiration of the insurance policy, the lease is terminated by mutual consent of lessee and lessor, the total funds held in escrow shall be disbursed to the lessee upon receipt by the insurer of a request for such disbursement signed by the lessor and the lessee and advising the insurer of the termination date of the lease and that all rents due and payable to the date of termination were paid by the lessee.

(8) That the interests of the lessor and lessee in the escrowed funds shall not be subject to the claims of creditors of either the lessee or lessor or others nor to legal process and may not be voluntarily or involuntarily alienated or encumbered by lessor or lessee.

§ 106.11 Lessors duties to lessee and insurer.

(a) The lessor shall perform the duties to the lessee required to be rendered by the terms of the insured lease.

(b) Upon the occurrence of a default by the lessee under the insured lease, the lessor shall give written notice simultaneously to the lessee and to the insurer of the specific default.

(c) Unless such default is corrected by amicable agreement of the lessee and lessor on or before 30 days from date of notice, the lessor will take prompt action to terminate the occupancy of the lessee, to make such repairs to the property as are necessary to restore it to its original condition, ordinary wear and tear excepted, and to deliver vacant possession to the insurer provided, however, this shall not be construed to prohibit improvements in the premises permitted by the lease.

(d) If such default is not corrected by the lessee, the lessor shall utilize the entire period for which there are funds available in escrow for the payment of rental claims (or the deductible period) in reasonably diligent efforts to eliminate or minimize losses by rerenting the property covered by the lease to another lessee subject to the approval of the insurer for the purpose of retaining the insurance coverage.