Purchase made possible by SBA loan

When the San Francisco Bay Guardian’s owners started looking for new digs, they were thinking of finding another lease, possibly one with an option to buy.

Thanks to a savvy real estate agent and a little-known policy change at the U.S. Small Business Administration, however, the Guardian now owns a chunk of San Francisco, a 30,000-square-foot, three-story building with sweeping views of the City by the Bay.

Editor and Publisher Bruce Brugmann and Associate Publisher Jean Dibble were in the market for a new lease and had actually found one, but when the Guardian approached the building owner about a possible buy-out option in the lease, he went one better, offering to sell right away. Great news, except that coming up with a 30 percent down payment on a $4.7 million building was a little out of reach for a locally owned, independent weekly.

At that point Guardian real estate representative Hal Moorehead, of Grubb & Ellis Commercial Real Estate, suggested the paper get an SBA loan, but Brugmann was skeptical because of an SBA rule prohibiting loans to media companies.

The Opinion Molder rule, a relic of the 1950s, forbade SBA financial assistance to businesses engaged in “the creation, origination, expression, dissemination, propagation or distribution of ideas, values, thoughts, opinions or similar intellectual property, regardless of medium, form or content.”

The rule was based on concerns that the constitutionally protected rights of freedom of speech and press could be compromised by either the fear of government reprisal or the expectation of government assistance. Moorehead, though, was aware of something Brugmann apparently wasn’t: The rule had been repealed in July 1994.

“We believe that our present regulatory procedures for dealing with loan applications and problems that might arise with these loans are sufficient to protect the public interest in a free press,” then SBA Administrator Erskine B. Bowles said in a SBA press release announcing the repeal.

A number of newspaper and magazine publishers quickly took advantage of the rule change, according to SBA spokesman Mike Stamler at the administration’s headquarters in Washington, D.C. The first alternative newsweekly to land a SBA loan was Milwaukee’s Shepherd Express, which obtained loan approval in September 1995 under the name Alternative Publications.

“I was not involved with the Shepherd at the time, but I ended up having to pay off the loan,” current Publisher Louis Fortis said with a chuckle. “It was a $100,000 loan, which was basically a working capital loan. We did pay off the loan, and the bank was happy, and the SBA was happy.”

“The problem is that with a commercial building they usually want 30 percent down,” said Executive Editor Tim Redmond: “Thirty percent is a lot of money, particularly in a recession for a small business like us. The building is like $4.7 million, so 30 percent down, that’s like $1.3 million, which is virtually impossible for a locally owned, independent paper in a time of recession. It would be very difficult for us to do. We don’t just have a million dollars in cash sitting around.

“So what they [the SBA] basically did was loaned us enough money to make the down payment,” Redmond continued.

A bit of other fancy footwork was involved, Redmond says. The people who had moved out of the building had bought their own building. Their buyer had agreed to take over part of their lease and was on the hook for a lease for five years. So they gave the Guardian “a bunch of money” to buy out the seller’s lease, which became part of the Guardian’s down payment.

“So there [was] … an amazing confluence of events that made this possible,” Redmond said. “But really the key linchpin event was that the SBA was willing to loan us the bulk of the down payment.”

“The program involves many different entities,” said Rich Grant of TMC Development in San Francisco, “but it involves two primary entities: a bank, in this case it was Sacramento Commercial Bank, or their parent, Placer-Sierra Bank Corp., and a certified development company, which is us.”

About 200 companies across the country are authorized or licensed by the SBA, he said.

“We have to be established as a nonprofit entity,” Grant said. “I am making this loan, either directly or indirectly, because I am anticipating this client is going to be creating employment over a period of time. …The whole trickle theory that those jobs will create spending dollars, which will be spent back into the economy, creating tax dollars.”

In reality, explained Grant, neither TMC Development nor the SBA loans any money to the client directly.

“The way the program works is the SBA is authorizing the sale of a debenture, which is a form of a bond that has a mortgage attached to it. That’s my simplistic explanation, anyway,” Grant said.

“So right now the SBA doesn’t have any money on the line and the client isn’t making any payments on a loan to the SBA,” Grant said. “They are making payments on their loan to Sacramento Commercial Bank. They are doing some improvements to the property, and once those improvements are completed, the bond will be sold, and I am basically going to pay back the bank for that bridge loan. The SBA’s involvement in this is really a credit guarantee, if you will.”

To obtain a loan of this type, a company has to qualify as a small business. The two primary qualifying criteria under the 504 Program are that the business has tangible net worth of less than $7 million and average after-tax net income for the past two years of less than $2.5 million.

“So you can see by those numbers that there would be a lot of companies that would qualify for this type of financing,” said Grant.

One of the biggest differences between SBA loans and a traditional bank loan, according to Grant, is that the term of a loan will be longer, a definite plus for a small business from a cash-flow perspective.

And so can the Guardian staff, which is expected to move into the new Bay Guardian Building this month. The Guardian’s current building, located on New Hampshire Street in the Northeast Mission District, is about 18,000 to 20,000 square feet, but not laid out especially well for the needs of the paper.

“Right now the building that we’re in is kind of a rabbit warren of little boxes and corners, and this is going to have lot more open space,” said Redmond. “We’re not getting a huge amount more space, because our tenant, animation company Mondo Media, will occupy the third floor. … But we are getting more flexibility, of course, because we’ll own the building, and we can lay it out.”

The new building is at the foot of Potrero Hill on Mississippi Street, just 13 blocks away from the building the Guardian has occupied for a decade.

“It’s right on the edge of where they’re building a new University of California campus. Our roof has a beautiful view of the Bay Bridge, the downtown skyline, and San Francisco Bay,” Redmond said.

“What Bruce [Brugmann] has always wanted for the Guardian is a building that we own, that is ours in perpetuity, so we never have to worry about an eviction, we never have to worry about a bad landlord, we never have to worry about any of that stuff,” Redmond said. “We now have a place that’s ours, that will anchor the Guardian as part of San Francisco forever.”

For more information about SBA loan programs, contact your nearest SBA district office or call the SBA Answer Desk at 1-800-8-ASK-SBA.

John Ferri is a freelance writer based in Tacoma, Wash.