Since 2007, a watchdog organization reported, nearly 50 clubs have received $110 million in lending from the Federal program since its expansion under President Obama. The SBA said its actions were needed because of the inability of most businesses to get loans from other sources during the recession.
A federal program expanded by President Obama that was “designed to help small businesses on Main Street recover from the financial crisis” has also backed loans to private country clubs as well as Rolex and Lamborghini dealerships, plastic surgery clinics, Napa Valley wineries, and other industries that “servic[e] recession-proof clientele,” reports a government watchdog organization, which called its findings proof of providing “welfare for the wealthy.”
In all, The Washington Times reported, since 2007 the U.S. Small Business Administration (SBA) has guaranteed 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 the SBA during that period, the watchdog organization said.
SBA loans made to country clubs that were cited specifically in the OpentheBooks.com report included Horseshoe Bend Country Club in Marietta, Ga., which received $5 million; Crystal Falls Golf Club in Dawsonville, Ga. ($4.3 million); Stafford Hills Club, in Tualatin, Ore. ($4.3 million); and West Hills Country Club, Middletown, N.Y. ($4.2 million). All told, 48 “exclusive clubs” received $110 million in SBA lending, OpenTheBooks.com reported.
The Times reported that it tried to contact Horseshoe Bend CC, as recipient of the largest SBA-backed loan for a private country club, but was told its manager was unavailable for comment.
The SBA’s funding was increased by $730 million by President Obama on the heels of the recession, the Times reported, packaging it as part of the 2009 stimulus bill, so it could guarantee more loans to small businesses to help alleviate the 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,” the Times reported.
As a result, the number of million-dollar loans the SBA backed spiked 37 percent from 2007 to 2013, according to Open the Books.com. In 2013, the SBA dispensed $14.8 billion in guaranteed seven-figure loans, compared to $9.3 billion in 2007, the Times reported.
In addition to the country club loans, $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 the Open the Books.com report.
Overall, Open the Books.com 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 elite-brand cars, diamonds and other jewelry, wine, cigars, and facelifts. 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, the Times reported. 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, the Times reported. 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, Miguel Ayala, an SBA spokesman, told the Times.
Most of the seven-figure loans defined in the Open the Books.com report were dispensed during the credit crisis, when normal businesses couldn’t get funded, Ayala added. The SBA was acting to fill the market gaps, he said.
“At the time, banks weren’t lending at all,” Ayala said. “The SBA doesn’t select who receives an SBA loan; our lending partners receive the applications and then on the back end 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.”
Seventy-seven percent of the $1 million in 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, Ayala told the Times. 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, the Times noted.
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 [its] concept of European and Asian-style spa and sauna offerings.” Ness Plastic Surgery, located near Minneapolis, got $2.9 million.
Other examples of loans being extended to service what appear to be “affluent hobbies,” the Times reported, include the Frisco (Texas) Gun Club, 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 the Lone Wolf Cigar Company in California. The cigar company boasts of a heritage dating back to 1893, with an exclusive 3,000 sq. ft. private membership cigar lounge for aficionados.
Betting on businesses for luxury products and services 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, the Times reported.
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, the Times reported.
The findings are certain to spur new oversight of the SBA program on Capitol Hill, the Times reported.
“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 (R-Mo.), told the 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.”
Writing about the findings of his organization’s study of SBA loans in Forbes, OpentheBooks.com’s Andrzejewski said that “the deeper, more systemic problem with the SBA is that the Federal government just isn’t very good at picking winners and losers.
“When the SBA approves a loan, taxpayer money is used to pit one taxpaying business against another,” he added. “The public should be asking some hard questions: How were these industries and subsidies chosen? What’s the public purpose to ask working and middle-class citizens to subsidize these businesses?”
Andrzejewski concluded by noting that the issue has become especially relevant since January 2012, when President Obama elevated the Administrator of the SBA to a Cabinet-level position.
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