the problems of small firms in manufacturing and wholesaling, as well as in retailing, who were displaced by urban renewal or other federally assisted projects. The Committee concluded that small independent businesses were at a distinct disadvantage in obtaining leases on prime commercial and industrial locations. The committee drafted legislation for a program of participating, and if necessary, direct federal guarantees of small business leases to be handled by the Small Business Administration. The original legislative proposal called for the establishment of a $50 million initial capital fund to carry out the lease guarantee program.3 Legislation to implement the committee's recommendations was introduced in 1962, but Congress failed to act on the proposal at that time.

4

The Senate Small Business Committee continued its investigation into the need for a federal lease guarantee program. In its 14th annual report, the committee conceded that the evidence was conflicting as to need and demand for the lease guarantee program. For one thing the Committee discovered that in a survey of the developers of 295 centers, sponsored by the International Council of Shopping Centers, Inc., 58 per cent of the developers were opposed to the idea of a federal lease guarantee program for small business, while only 32 per cent definitely favored such a program. Developers opposing the legislation cited the following reasons for their opposition:5

1. The key factor in leasing is the ability of the independent as evidenced by his past record.

2. The government guarantee would promote economic waste by encouraging inferior merchants.

3. The program would lead to even more overbuilding of shopping centers, often in already saturated markets. 4. Adequate provisions already exist for leasing to desirable independents without such a guarantee.

"Small Business, Lease Guarantees, Report of Select Committee on Small Business, United States Senate (Washington: Government Printing Office, 1962).

4

Fourteenth Annual Report, Select Committee on Small Business, United States Senate (Washington: Government Printing Office, 1964), pp. 91-93.

of government into what is primarily a matter of business judgment and initiative.

The Senate Small Business committee concluded that the lease guarantee program would be of real benefit to only a minority of small retailers and other businessmen, a detriment to another minority, and of no effect, consequence-or interest to the great majority. However, the committee recognized that many, if not most, federal programs of loans, guarantees and subsidies were enacted and are operated to meet needs felt by only a small minority of the American population, and often for only a particular class which is eligible.

As a result of the conflicting nature of the evidence regarding the need and demand for a lease guarantee program, the Senate Small Business Committee recommended that the benefits of the program be made immediately available to only those small business concerns which were in the most urgent need of improved facilities. A pilot program was recommended with eligibility limited to small businesses displaced by federally aided urban renewal or highway development projects, and firms operated by persons who are economically disadvantaged. The idea of the pilot program was favored because it afforded an opportunity for the evaluation of the feasibility and effectiveness of the lease guarantee program, at modest cost and on a small scale.

The provision for lease guarantee insurance remained dormant until 1965, when the Senate and House Banking and Currency Committees decided that a sufficient record had been established in the hearings before the Senate Small Business Committee to justify the establishment of a pilot program. Accordingly, the Banking Committee added the lease guarantee provision to the Housing and Urban Development Act of 1965 which was then pending in Congress. The provision was essentially patterned on the 1962 bill, except that the initial capital fund for the program was reduced from $50 million to $5 million, and eligibility was limited to small firms displaced by urban renewal or qualifying under the Economic

guarantee program was then given the Small Business Administration when the Housing and Urban Development Act of 1965 became Public Law 89-117.

In granting the authority to proceed with the lease guarantee program, Congress set out the following restrictions and limitations on the power of the SBA to issue guarantees:8 (1) The SBA, shall, to the greatest extent practicable, exercise the powers. . . in cooperation with qualified surety or other companies on a participation basis. (2) That no guarantee meeting the requirements of the small business applicant is otherwise available on a reasonable term.

(3) There exists a reasonable expectation that the small business concern in behalf of which the lease guarantee is issued will perform the covenants and conditions of the lease.

After more than a year of planning, a task force was set up within the SBA in December 1966 to develop the operating plan to implement the lease guarantee authority. This plan established the procedural guidance and necessary documentation to permit implementation. The lease guarantee program was formally launched on a pilot basis on May, 1967. The first pilot project involved the development of a shopping center to provide space for twelve small businessmen displaced by an urban renewal project in Mobile, Alabama. Subsequent projects were developed in Miami, Cleveland and other cities.9

Additional legislation was passed and signed by President Johnson on October 11, 1967, amending the eligibility requirements for lease guarantee insurance to include all small busi

7

Housing and Urban Development Act of 1965, Report of the Committee on Banking and Currency, United States Senate, 89th Congress, First Session (Washington, Government Printing Office, 1965), pp. 67-69.

8

Lease Guarantee Program, Proposed Operating Plan, Volume I (Washington, Small Business Administration, 1967), Mimeographed.

Review of Small Business Administration Financial Assistance Programs, Report of Select Committee on Small Business, United States Senate, 90th Congress, First Session (Washington, Government Printing Office, 1967), pp.. 9-10.

quirements was January 9, 1968. The extension of the limited program of lease guarantee insurance now permits all small business concerns access to an elevated credit status which permits them to compete more effectively than before with larger firms in seeking desirable business locations.

Private Participation in the Lease Guarantee Program

Congress hoped that its lease guarantee legislation would encourage private insurance companies to develop their own lease guarantee insurance programs without direct involvement by the Federal government. The enabling legislation authorized that the Small Business Administration "shall, to the greatest extent practicable, exercise the power . . . in cooperation with qualified surety or other companies on a participation basis."10 In conformity with this provision, the SBA seeks participation on the part of private companies, with the SBA standing by in the role of reinsurer. The law specifies a qualified company to be a corporation authorized under the applicable state law to engage in lease guarantee insurance agreements with small business con

cerns.

To assure private participation or cooperation to the greatest extent practicable, the participation agreement between the private companies and the SBA is based on the insurance companies being responsible for paying 100 per cent of the claims and losses rising out of a guaranteed lease up to an amount equal to twelve months of guaranteed rent. Subsequent losses are shared 80 per cent by the SBA and 20 per cent by the participating company. Private companies are thus expected to assume the obligation for lease defaults in most circumstances, while the SBA stands ready to assume excess losses which might be associated with a severe economic recession.11

The maximum term of the guarantee on which the SBA is allowed to enter may extend for the term of the lease or

10 Lease Guarantee Program, op. cit.

11 Robert C. Moot, "Lease Guarantee Program of the Small Business Administration," Small Business Administration, Mimeographed.

minimum term of five years is required by the SBA. The SBA may guarantee a portion of the rental payable under the lease when participating or cooperating with a private insurance company, or if participation is not available, the SBA may guarantee the full amount of the minimum rental payable under the lease. In other words, the SBA is authorized to proceed with a program of direct lease guarantees in the event that private participation is not available.

The small business concern applying for lease guarantee insurance with the participating insurance company pays a single premium fee for the entire period of the policy. The dollar amount of the premium is stated as a percentage of the total aggregate guaranteed rental during the policy period. As established by one participating company, Commercial Loan Insurance Company, Milwaukee, Wisconsin, the percentage varies from 5.4 per cent of the total guaranteed rental for the minimum five-year policy period, to 2.8 per cent on the maximum 15-year policy written by the company. The lease guarantee plan adopted by CLIC insures the fixed minimum rentals during the policy period up to an aggregate amount of $500,000.12

For its part in participating with private companies as a reinsurer, the SBA fixes a uniform annual fee for its share of any guarantee which is to be payable in advance and cover the term of the lease. The purpose of the premium fee is to establish an adequate loss reserve to minimize adverse risk growing out of early lease cancellations. The amount of the premium fee payable to the SBA is determined by the application of actual practices which consider the expected rate of default based on analysis of the characteristics of the business, the influence of economic conditions, and the number of months' rent lost resulting from a default. In no case does the law permit the SBA's share of the premium to exceed 22 percent of the annual guaranteed rental payable under the lease. The SBA requires that the premium for the entire term be payable in advance, so that the bookkeeping and

12 Lease Guarantee Insurance (Milwaukee: Commercial Loan Insurance Corporation, 1967), p. 5.