B-149685, DEC 20, 1973

B-149685, DEC 20, 1973

OUR VIEWS THAT INSTRUMENT SUBSTANTIALLY IN THE FORM OF THE SUBMITTED LEASE INSTRUMENT CONCERNING PERSONAL PROPERTY, ARE "LEASES" AS THAT TERM IS USED IN THE SBA LEASE GUARANTEE AUTHORITY, SECTION 410(A) OF THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED, 15 U.S.C. 692.

TO MR. THOMAS S. KLEPPE:

THIS IS IN REPLY TO YOUR LETTER OF SEPTEMBER 11, 1973, IN WHICH YOU STATE THAT YOU WOULD APPRECIATE OUR CONCURRENCE IN YOUR VIEW THAT INSTRUMENTS SUBSTANTIALLY IN THE FORM OF THE LEASE INSTRUMENT WHICH YOU ATTACHED (LEASE AND AGREEMENT) CONCERNING PERSONAL PROPERTY, ARE "LEASES" AS THAT TERM IS USED IN YOUR LEASE GUARANTEE AUTHORITY, SECTION 401(A) OF THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED, 15 U.S.C. 692. THIS SECTION PROVIDES, IN PERTINENT PART, AS FOLLOWS:

"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. ***"

THE INSTRUMENT ATTACHED TO YOUR LETTER IS SHOWN TO BE A PRELIMINARY DRAFT DATED AUGUST 1, 1973, OF A "LEASE AND AGREEMENT BY AND BETWEEN OHIO AIR QUALITY DEVELOPMENT AUTHORITY, AS LESSOR AND - AS LESSEE." IT IS A COMPREHENSIVE AGREEMENT COVERING 87 DOUBLE-SPACED TYPEWRITTEN PAGES.

IT APPEARS FROM THE PRELIMINARY RECITAL TO THE AGREEMENT THAT MANY SMALL BUSINESSES ENGAGED IN INDUSTRIAL, MANUFACTURING AND COMMERCIAL ENTERPRISES WITHIN THE STATE CANNOT FIND ADEQUATE OR REASONABLE FINANCING TO ENABLE THEM TO ACQUIRE OR CONSTRUCT, INSTALL AND EQUIP FACILITIES FOR THE ABATEMENT AND CONTROL OF AIR POLLUTION CAUSED BY THEIR OPERATIONS AS REQUIRED BY FEDERAL AND STATE LAWS. CESSATION OF THEIR OPERATIONS WOULD RESULT IN INCREASED UNEMPLOYMENT, DEPLETION OF AVAILABLE JOBS, ETC. THE LESSOR WAS CREATED AND ESTABLISHED BY STATE LAW AND IS AUTHORIZED AND EMPOWERED TO ACQUIRE, CONSTRUCT, MAINTAIN AND REPAIR AIR QUALITY FACILITIES AND TO FINANCE THE SAME THROUGH THE ISSUANCE OF ITS AIR QUALITY REVENUE BONDS, THE BONDS TO BE SOLD AS ONE ISSUE, AND TO LEASE SUCH AIR QUALITY FACILITIES TO SMALL BUSINESS ENTERPRISES. IT ALSO APPEARS FROM THIS RECITAL THAT WHERE A SMALL BUSINESS ENTERPRISE DESIRES TO LEASE THE AIR QUALITY FACILITIES UNDER THE TERMS AND CONDITIONS OF THE AGREEMENT, THE SMALL BUSINESS ADMINISTRATION WILL GUARANTEE THE PAYMENT OF RENTALS BY THE LESSEE. "AIR QUALITY FACILITIES" IS DEFINED IN THE BODY OF THE LEASE AND AGREEMENT TO MEAN THE "METHODS, PROCESSES, STRUCTURES, AND EQUIPMENT OR ANY COMBINATION THEREOF, THAT REMOVES, REDUCES OR RENDERS LESS NOXIOUS AIR CONTAMINANTS DISCHARGED INTO THE AIR."

IT IS EXPLAINED IN YOUR LETTER THAT SBA HAS ENCOUNTERED AN URGENT NEED FOR THE GUARANTEE OF RENTALS IN THE LEASING OF ESSENTIAL PERSONAL PROPERTY SUCH AS POLLUTION ABATEMENT, CONSTRUCTION AND OTHER VERY EXPENSIVE EQUIPMENT AND THAT THE ACQUISITION OF SUCH EQUIPMENT IS ORDINARILY BEYOND THE FINANCIAL ABILITY OF SMALL BUSINESSES WITHOUT SOME ARRANGEMENT WHICH WOULD AMORTIZE THE COST OF EQUIPMENT OVER A LONG PERIOD OF YEARS.

YOU STATE THAT UPON EXAMINATION OF THE VARIETY OF FORMS OF WRITTEN INSTRUMENTS USED IN THE LEASING OF PERSONAL PROPERTY IT BECOMES CLEAR THAT THE TRADITIONAL CONCEPTS OF REAL PROPERTY LEASING ARE NOT SUITABLE OR ADAPTABLE FOR THE LEASING OF EXPENSIVE EQUIPMENT, SUCH AS POLLUTION ABATEMENT EQUIPMENT AND THAT, IN ORDER TO SATISFY THE DEMANDS OF MODERN USAGE AND CUSTOM IN THE FIELD OF PERSONAL PROPERTY LEASING, SPECIALIZED FORMS HAVE EVOLVED.

THE LEASE FORM ATTACHED TO YOUR LETTER IS STATED TO BE TYPICAL OF THOSE USED IN THE LEASING OF PERSONAL PROPERTY. YOU STATE THAT USUALLY THESE AGREEMENTS NEGATE ANY ABATEMENT OF RENT FOR ANY REASON, OMIT ANY DUTIES FOR THE LESSOR AND MAY OR MAY NOT INDICATE WHETHER THE LESSEE IS BUILDING AN EQUITY OF OWNERSHIP IN THE PROPERTY. IT IS YOUR OPINION THAT THE SBA SHOULD NOT BE CONCERNED WITH WHETHER THE INSTRUMENT IS CALLED A LEASE, A LEASE-PURCHASE CONTRACT, OR A LEASE WITH AN OPTION TO PURCHASE, AS LONG AS THE TRANSACTION IS A CONTRACT WHEREBY THE SMALL BUSINESS CONCERN WILL OBTAIN POSSESSION OF PERSONAL PROPERTY FOR AN AGREED PERIOD OF TIME IN EXCHANGE FOR RENT DURING THAT TIME.

IT IS YOUR VIEW THAT THE ABOVE-QUOTED PROVISIONS OF SECTION 401(A) OF THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED, WERE MEANT TO BE APPLICABLE TO LEASES OF BOTH REAL AND PERSONAL PROPERTY. WE HAVE BEEN INFORMALLY ADVISED BY YOUR ADMINISTRATION, HOWEVER, THAT THE PROVISIONS OF THIS SECTION HAVE NEVER BEEN APPLIED TO GUARANTEE THE PAYMENT OF RENTALS UNDER LEASES OF PERSONAL PROPERTY. FOR THE FOLLOWING REASONS WE HAVE CONCLUDED THAT THE AUTHORITY TO GUARANTEE THE PAYMENT OF RENTALS UNDER "LEASES OF COMMERCIAL AND INDUSTRIAL PROPERTY" AS USED IN SECTION 401(A) DOES NOT INCLUDE AUTHORITY TO GUARANTEE THE PAYMENT OF RENTALS UNDER LEASES OF PERSONAL PROPERTY.

THE STATUTE FAILS TO DEFINE THE TERMS "LEASES" AND "COMMERCIAL AND INDUSTRIAL PROPERTY." HOWEVER, A REVIEW OF THE LEGISLATIVE HISTORY DOES PROVIDE GUIDANCE ON THIS MATTER.

TITLE IV OF THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED, WAS ADDED BY SECTION 316(A) OF THE HOUSING AND URBAN DEVELOPMENT ACT OF 1965. THE LATTER ACT PASSED THE HOUSE AND SENATE IN BILLS CONTAINING DIFFERING LANGUAGE AND THEY WERE SENT TO CONFERENCE COMMITTEE FOR RECONCILIATION. THE LANGUAGE OF SECTION 316(A) AS AGREED TO IN CONFERENCE CONFORMS TO THAT OF THE SENATE BILL (S. 2213, 89TH CONG., 1ST SESS. SECTION 1008). THE REPORT ACCOMPANYING S. 2213, STATES:

"THE SENATE SELECT COMMITTEE ON SMALL BUSINESS HELD HEARINGS IN 1959 AND 1961 ON THE EXTREME DIFFICULTIES EXPERIENCED BY MANY SMALL BUSINESS CONCERNS IN OBTAINING LEASES OF PRIME COMMERCIAL AND INDUSTRIAL LOCATIONS, IN COMPETITION WITH LARGER CONCERNS HAVING HIGHER CREDIT RATINGS. IN A REPORT ISSUED IN 1962 (S. REPT. 1532, 87TH CONG., 2D SESS.), THE SMALL BUSINESS COMMITTEE STRONGLY RECOMMENDED ESTABLISHMENT OF A LEASE GUARANTEE PROGRAM IN SBA, AND A BILL TO IMPLEMENT THAT RECOMMENDATION WAS INTRODUCED (S. 3345, 87TH CONG., 2D SESS.). SECTION 1008 OF THE PRESENT BILL IS PATTERNED ON THE 1962 BILL ***." S. REPT. 378, 89TH CONG., 1ST SESS. 68- 69.

THE 1962 REPORT REFERRED TO IN THE SENATE REPORT RECITES THE PROBLEMS WHICH PROMPTED THE RECOMMENDATION OF INTRODUCTION OF LEGISLATION TO GIVE THE SBA LEASE GUARANTEE AUTHORITY. THE REPORT STATES:

"IN APRIL 1959, THE SENATE SMALL BUSINESS COMMITTEE'S SUBCOMMITTEE ON RETAILING, DISTRIBUTION, AND FAIR TRADE PRACTICES HELD A 2-DAY PUBLIC HEARING ON ALLEGED DISCRIMINATORY PRACTICES AGAINST SMALL-BUSINESS CONCERNS IN SUBURBAN SHOPPING CENTERS. IN AN ENSUING REPORT, THE FULL COMMITTEE CONCLUDED THAT WIDESPREAD ALLEGATIONS OF DIFFICULTIES AND DISCRIMINATIONS ENCOUNTERED BY SMALL BUSINESS IN OBTAINING DESIRABLE LEASES IN SHIPPING CENTERS WERE WELL FOUNDED. ***

"BOTH IN SUBURBAN SHOPPING CENTERS AND IN DOWNTOWN RETAIL AREAS, WE CONCLUDED, THE SMALL BUSINESSMAN WAS FINDING IT DIFFICULT OR IMPOSSIBLE TO OBTAIN A LEASE ON FIRST-CLASS COMMERCIAL SPACE, AND, WHEN HE COULD OBTAIN ONE, HE WAS SOMETIMES REQUIRED TO PAY A HIGHER RENTAL THAN CHAIN STORES WITH WHICH HE COMPETED. SUBSEQUENTLY, WE RECEIVED ALLEGATIONS FROM SMALLER WHOLESALERS AND MANUFACTURERS THAT THEY FACED SIMILAR PROBLEMS IN NEGOTIATING LEASES OF DESIRABLE COMMERCIAL AND INDUSTRIAL LOCATIONS." REPT. 1532, P. 1.

THE BILL INTRODUCED PURSUANT TO THE RECOMMENDATION OF THE COMMITTEE CONTAINED THE FOLLOWING LANGUAGE WHICH IS SUBSTANTIALLY THE SAME AS THAT FINALLY ENACTED:

"THE ADMINISTRATION MAY, WHENEVER IT DETERMINES SUCH ACTION TO BE NECESSARY OR DESIRABLE IN FURTHERANCE OF THE PURPOSES OF THIS TITLE, AND UPON SUCH TERMS AND CONDITIONS AS IT MAY PRESCRIBE, GUARANTEE THE PAYMENT OF RENTALS UNDER LEASES OF COMMERCIAL AND INDUSTRIAL PROPERTY ***." 3345, 87TH CONG., 2D SESS., SECTION 402(A).

EVEN THE HOUSE LANGUAGE WAS ALSO DIRECTED TO THE LEASE OF ONLY REAL PROPERTY. SEE. H. REPT. NO. 365, 89TH CONGRESS, PP. 29-30.

IT IS APPARENT FROM THIS LEGISLATIVE HISTORY THAT THE WORDING OF THE SECTION HAS TO DO WITH LEASES OF LOCATIONS FOR COMMERCIAL AND INDUSTRIAL BUSINESS AND IS USED TO DESCRIBE REAL RATHER THAN PERSONAL PROPERTY. ARE THEREFORE UNABLE TO CONCUR IN YOUR VIEW THAT INSTRUMENTS SUBSTANTIALLY IN THE FORM OF THE LEASE ATTACHED TO YOUR LETTER ARE LEASES AS THAT TERM IS USED UNDER THE CITED LEASE GUARANTEE AUTHORITY. SINCE WE CANNOT CONCUR WITH THE VIEW THAT THE LEASE GUARANTEE AUTHORITY INCLUDES LEASES OF PERSONAL PROPERTY, IT IS UNNECESSARY, AT THIS TIME, TO CONSIDER WHETHER SBA SHOULD BE CONCERNED WITH WHETHER THE INSTRUMENT USED IN "LEASING" THE PERSONAL PROPERTY IS A STRAIGHT LEASE, A LEASE-PURCHASE CONTRACT, OR A LEASE WITH AN OPTION TO PURCHASE.