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How Housing Dealt a Double Blow to Small Business

The slump isn't just hurting business; it's also making it hard for contractors, suppliers, and others to borrow against their homes

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SPECIAL REPORT

Keith Sutton has been building homes in Cleveland since 1991 and was selling 20 houses a year at the top of the boom. Today he’s sitting on 50 lots he can’t get rid of and is $3.5 million in debt, including close to $1 million he’s already defaulted on. “I couldn’t have anticipated in 2006 that it was going to last well into 2011 and beyond,” he says. “I thought it was going to be a blip.” Sutton has just two workers now, down from 13 before the bust, and he hasn’t sold a house in a year. “I’m barely hanging on,” he says.
The housing market’s persistent woes weigh doubly on small business. Industries such as construction and real estate are dominated by small companies, and many entrepreneurs borrow against their homes to finance their businesses. That means small business, which accounts for half of private nonfarm gross domestic product and 65 percent of job growth, is unlikely to recover before the housing industry rebounds. “The recent decline in housing prices is significant enough to be a real constraint on small business finances,” researchers at the Federal Reserve Bank of Cleveland concluded in a December report.
Entrepreneurs whose houses have lost value are less likely to invest savings in their businesses, and it’s harder for them to raise money by mortgaging their homes, says Denny Dennis, senior research fellow at the National Federation of Independent Business. The group says 94 percent of small employers own their homes, and a quarter of owners of small companies borrow against their houses for business purposes, according to market data provider Barlow Research Associates. The Cleveland Fed estimates that business owners have lost $7.9 billion in available home equity credit in the housing bust. “Their capacity to borrow is really constrained,” Dennis says.
About one-sixth of the nation’s private employers are small companies in housing-related industries, including homebuilders, real estate agents, architects, and furniture suppliers, Census data show. Although the construction industry has often led the way out of previous recessions, few small housing-related companies have gotten much of a lift from the current recovery. “This time the only growth driver, if we’re having one, is export industries,” Dennis says.
While manufacturers and tech companies can tap into growing markets abroad, plumbers and plasterers are bound to their local economies. Sales at small homebuilders and specialty contractors such as roofers and electricians have declined each year since 2007, according to data from financial software maker Sageworks. Home prices ticked up in the second half of 2009, but they now match the recession’s May 2009 low, according to the S&P/Case-Shiller Home Price Index of 20 cities.
Dave Penniman, who runs a six-employee painting business in San Ramon, Calif., estimates that he is $125,000 underwater on the house he bought in 2004. Having no cushion of equity in his home makes him wary of excessive risk in his business. “You definitely can’t take on really big jobs that you would like to,” he says. “You just don’t want to roll the dice.”
Even at the high end of the housing market, the recovery is halting. Late in 2008, Brian Lazarus was installing custom wood furniture and interiors at a five-building home compound under construction in western Massachusetts when the owner, a Wall Street executive, landed on the job site in a helicopter. With three suitcases full of cash, he paid all the contractors for the work they had done so far and sent everyone home. “Then they literally boarded the compound up,” Lazarus recalls. Work resumed early this year, only to be suspended again in the spring. Lazarus says the project manager told him: “We thought the economy was going to pick back up, and it’s obviously not.”
The bottom line: Small companies tied to housing make up one-sixth of private employers, and they’re unlikely to recover until the housing market does.

Tozzi covers small business for Businessweek.com.

The EB-5 Program: Create American Jobs, Get a Green Card

The visa program has pulled in $1.5 billion and created 31,000 jobs. Now U.S. Citizenship and Immigration Services is pushing to streamline it

Seldon expects to get $20 million from foreign investors John Stanmeyer for Bloomberg Businessweek

By Nick Leiber

This Week

After spending eight years and $20 million in federal grants creating portable water purification systems, Seldon Technologies last year was ready to start selling its devices to the developing world. But bank credit and venture capital were tight, and the Windsor (Vt.) company couldn’t raise the money it needed to launch production.
So co-founder Alan Cummings turned to a federal program that offers foreigners permanent U.S. residency if they invest in companies that create jobs. Cummings says he has already received “millions” and expects to secure a total of $20 million from 40 foreign investors, “if not this year, next.” He plans to hire 140 people. “It’s been a lifeline to capital as we’re trying to grow this business,” says Cummings, 63.
Hundreds of small ventures across the U.S. are finding backers through the visa program, known as EB-5. The 21-year-old initiative makes 10,000 green cards available to foreigners who invest a minimum of $500,000 in U.S. companies that create or preserve at least 10 jobs in the country. The U.S. Citizenship and Immigration Services estimates that EB-5 has attracted more than $1.5 billion in investment since its inception, creating some 31,000 jobs. “This is a unique way for immigration to enhance the U.S. economy … at no expense to the U.S. taxpayer,” says Stephen Yale-Loehr, who teaches immigration law at Cornell Law School.
The primary conduit of investments for the EB-5 program, though, faces an uncertain future. About 90 percent of the money is funneled through private companies, known as regional centers, which match overseas investors with businesses in need of capital. These companies are authorized to participate in the program by legislation that expires every few years. They could be shut down if Congress fails to reenact the law by September 2012. Immigration Services data show that in the past five years regional centers were responsible for nearly 10,000 jobs and more than $400 million in investment. In 2007 there were only 11 of them. Today there are 147, with 146 more seeking approval.
Because of the program’s complexity, EB-5 uses less than half its annual quota of visas, meaning it is responsible for a small fraction of the 140,000 employment-based residency visas allotted to foreigners each year under a variety of programs. State Dept. data show that 1,885 people—about half of them from China—got EB-5 visas in the 12 months through September 2010. In the six months through March 2011, the State Dept. estimates it issued more than 2,100 visas. Regional center directors say the number of applications has increased because it is so difficult for small businesses to get financing these days.
Taher Kameli, executive director of Chicagoland Foreign Investment Group, a center in Chicago, says interest typically flags in the year before the program comes up for renewal, as potential investors fear EB-5 may be canceled and they may not get a green card. “If Congress can extend the program this year, either make it permanent or extend it for a [longer] period of time, that would help the momentum that these regional centers have,” says Kameli. His center has helped 103 investors put $51.5 million into six companies, including assisted living facilities and a medical equipment manufacturer.