A federal program expanded by President Obama to help small businesses on Main Street recover from the financial crisis has backed loans to Rolex and Lamborghini dealerships, plastic surgery clinics, Napa Valley wineries, country clubs, and other industries servicing recession-proof clientele, government records show.
In all, the U.S. Small Business Administration has guaranteed since 2007 about 35,000 loans totaling $67 billion to businesses that primarily service an affluent lifestyle, according to government data compiled by American Transparency’s OpenTheBooks.com, an online portal aggregating 1.3 billion lines of federal, state and local spending records.
The loan guarantees to luxury industries — each $1 million or more in size — amount to about 20 percent of the total handed out by SBA during that period, the agency said.
Mr. Obama increased SBA’s funding by $730 million on the heels of the recession, packaging it as part of the 2009 stimulus bill, so it could guarantee more loans to small businesses to help alleviate the so-called credit crunch at the time.
The White House heralded the effort and subsequent actions — such as increasing the SBA’s maximum loan amounts from $2 million to $5 million — as “a crucial step in supporting economic recovery and job creation.”
As a result, the number of million-dollar loans the SBA backed spiked 37 percent from 2007 to 2013, according to Open the Books. Last year, the SBA dispensed $14.8 billion in seven-figure loans guaranteed by the administration, whereas in 2007 the amount was $9.3 billion.
Much of the money was guided to recession-proof industries, not the Main Street, mom-and-pop shops which form “the backbone of the American economy,” or that “lead the way to the industries of the future,” as was trumpeted by the White House at the time as reason for the additional funding.
From 2007 to 2013, the SBA-backed a $5 million loan to a country club on the outskirts of Atlanta with an membership initiation fee of $10,000; $4 million in loans was given to a Rolex dealer in an affluent suburb of Chicago, and $3 million in loans went to a plastic surgery clinic near Minneapolis, according to an Open the Books report released Tuesday.
The findings are certain to spur new oversight of the SBA program on Capitol Hill.
“The purpose of SBA loan programs is to provide opportunities for growing small businesses that can’t otherwise obtain financing,” House Small Business Chairman Sam Graves, Missouri Republican, told the The Washington Times. “The Committee’s oversight and a recent Inspector General’s report have found that much improvement is needed in how the SBA manages its loan approval process. Congress has repeatedly asked the SBA to devote its resources to better management of core programs so that much-needed capital reaches the small firms that have the most promise.”
Overall, Open the Books found that $4.2 billion in federally-backed loans from the SBA went to high-end luxury vacation destinations for both people and pets alike; $760 million was given to businesses selling their clientele elite-brand cars, diamonds and other jewelry, wine, cigars, and face-lifts . Another $161 million was awarded to exclusive clubs for golf, yachting, thoroughbred horses and hunting. The other money went to help fund Fortune 100 companies and private equity firms, according to the report.
“In America, we should never demonize success, but we don’t need to subsidize it either,” said Adam Andrzejewski, founder of OpenTheBooks.com. “Loans to luxury limousine companies, private country clubs, Beverly Hills diamond suppliers, and upscale resort destinations serve no public purpose.”
The majority of the $1 million-plus loans — about 25,000 — were given through the SBA’s so-called 7(a) guarantees, which are extended to eligible borrowers for starting, acquiring and expanding a small business. About 9,000 loans were guaranteed through the SBA’s 504 program, which gives established businesses long-term fixed-rate financing on assets such as land and buildings.
The SBA doesn’t dispense loans itself, but rather provides financial guarantees to banks if a company backed by the SBA defaults. If none of the companies default, the government won’t owe anything. If the SBA-backed business goes under, however, the government is on the hook to repay a portion of the loan.
Currently, the fees and interest generated off of the loans is enough to cover any companies which default, leading to no cost to the taxpayer, said Miguel Ayala, an SBA spokesman.
Most of the seven-figure loans defined in the Open the Books report were dispensed during the credit crisis, where normal businesses couldn’t get funded, Mr. Ayala said. The SBA was acting to fill the market gaps, he said.
“At the time, banks weren’t lending at all,” Mr. Ayala said. “The SBA doesn’t select who receives an SBA loan, our lending partners receive the applications and then on the backend say what products they have available for their clients. For many businesses seeking conventional loans, to expand or extend their line of credit, banks offered them a SBA loan.”
Mr. Ayala said that 77 percent of the $1 million backed loans went to businesses owned by underserved demographic groups such as women, ethnic minorities and veterans or to businesses located in poverty-ridden neighborhoods. Also, the million-plus dollar loans only represented about 20 percent of the money distributed by the agency at the time, with the vast majority (80 percent) being dispensed in amounts of less than $1 million, he said.
Still, many seemingly recession-proof businesses seemed to line up for the government handout.
Forty-seven SBA-backed loans totaling $21 million went to exclusive Rolex dealers, and 26 high-end jewelers received $37 million, including some operating in opulent neighborhoods such as Beverly Hills and the Hinsdale, outside of Chicago, the data shows. Eleven Napa Valley, California-based wineries got $19 million, and another $100 million-plus in guarantees went to Sonoma wine county bottlers, vineyards, and management companies, according to the report.
Among the luxury-serving businesses evaluated in the report, $92 million in SBA-backed loans went to 55 beauty spas across America, and another $41 million went to self-described plastic surgeons or so-called “aesthetic clinics.”
Spa Castle, with locations in Texas and New York, received $6.2 million in loans to pioneer their concept of European and Asian style spa and sauna offerings. Ness Plastic Surgery, located near Minneapolis, got $2.9 million to help in their mission of “Improving you,” according to their official Website.
Both small businesses didn’t respond to requests for comment from The Times.
Horseshoe Bend Country Club, located outside of Atlanta, received the largest SBA-backed loan for a private country club, receiving a $5 million SBA-backed loan. The club said Monday its manager was unavailable for comment.
Other examples of loans being extended to service affluent hobbies include the Frisco Gun Club in Texas, which advertises itself as a “luxury gun range and club” with memberships starting at $7,000. It took out an SBA-backed loan totaling $3.2 million, the data shows.
Cigar shops received $20 million in SBA-backed loans, with $2 million going to Lone Wolf Cigar Company in California. The cigar company boasts of a heritage dating back to 1893, with an exclusive 3,000 square-foot private membership cigar lounge for aficionados.
The Frisco Gun Club is closed on Mondays and email requests for comment went unanswered. Lone Wolf Cigar declined to comment.
However, betting on businesses for luxury doesn’t always pay off, the report found.
Lamborghini dealerships in both Chicago and Orange County, California — after reaping $3.5 million collectively in SBA-backed loans — both went belly-up during the time period evaluated.
Although the Orange County loan was repaid, the Chicago loan remains outstanding, federal data shows.
Both dealerships have since closed their doors and couldn’t be reached for comment by the Times.