SBA 504 refinancing revival?

- Asian Hospitality Judy Maxwell (Assistant Editor)

Hotel industry still lagging, better access to capital critically needed boost, say experts…

Wednesday, July 17, 2013 – DESPITE ALL THE POSITIVE economic news and metrics generated by the US hotel industry, many hotel owners are still treading water as their property values have barely improved in the past few years and remain unattractive for lenders playing the field for hotter hotel prospects.

 “The money is only there for $100m REITS, Wall Street and private equity,” says Nitin Shah, an hotelier and chairman and CEO of Embassy National Bank in Atlanta, a southeast regional operation and a major lender of commercial mortgage loans backed by the Small Business Administration (SBA).

One of the few saviors for small hotel companies looking for new capital is SBA 7a, the loan guarantee program offered by the U.S. Small Business Administration.

Another program SBA 504 is also available, but a key – and incredibly popular – provision that allowed borrowers to use the money to refinance debt sunset last September, despite efforts to revive it by small-business groups, including AAHOA and AH&LA.

A new proposal is before the Senate. In mid-June the Senate Committee on Small Business & Entrepreneurship voted in favor of the Commercial Real Estate and Economic Development or CREED Act of 2013, which would restore the 504-debt-refinancing provision. Senate Bill 289 has yet to reach the Senate floor for a vote; and a Congressional report gives it a 9 percent chance of passing.

A similar measure – House Bill 1240 went to the House Committee on Small Business in March, where it stands today. The chances of that passing are even less.

Shah says many members of Congress do not understand the SBA loan programs and believe that any vote in favor of the measures would appear like a nod for more government spending. But the SBA loan programs are self-funded through fees and interest paid by lenders and borrowers; and they continue to be the most popular financing vehicles for commercial borrowers, including hotels, which unfortunately are perceived as the most risky investment out there.

This year, said Shah, Embassy expects to close on about 40 SBA 7a loans, a popular vehicle for small hotel owners who are looking to refinance their asset, buyout partners, invest in another hotel or generate capital for property improvements.  The program gives borrowers access to up to $5m at 6 percent interest with a loan-to-value ratio of up to 85 percent.

Meantime, “the SBA 504 structure (without the refinancing component) continues to be a great option for hospitality acquisitions between $5m to $12m,” says Scott Corrigan, managing director of Hospitality Finance Solutions of Raleigh, NC. “With the ability to attain an aggressive blended interest rate with 80 percent to 85 percent financing (hotels), the SBA 504 structure is not utilized enough in today's hotel financing arena.” The funds can be used for acquisitions and new construction.

At the same time, hoteliers who need to borrow more than the SBA 7a limit to refinance their property are out of luck, because that’s what the CREED Act 2013 proposal would provide.

“What is happening,” explained Shah, “is that whatever little financing available is geared toward the institutional borrower, the sophisticated borrower. SBA 504 is for people who would not qualify for a conventional SBA loan. That is the reason why the program was designed. Unfortunately, the lending environment does not separate one (borrower) from another; they just lump it all together.”

When the measure died in September after less than a year in heavy use, 2,700 small businesses were able to refinance $7bn in “old, expensive debt,” said Corrigan. The current Senate proposal is to make the refinancing part of the program a permanent option, but some on Capitol Hill say that section of the bill has been cut back to a five-year term.

Jeff McKee, managing director of Premier Capital Associates in Bellevue, WA, says, “SBA 504 refinancing needs to be revived for the lower-end properties because they need the extra leverage. That sector’s property values have not recovered as fast as other tiers in the U.S. market.”

McKee’s fellow managing director Greg Morris said when 504 was first conceived, it was solely for new development, but the Great Recession quashed most projects. After Congress voted to allow 504 refinancing in the Jobs Act of 2010, the program was rolled out very slowly with few lenders even knowing about it. “The initial product was confusing and it wasn’t received well. Once it was clarified – around March 2012 – there was a rush to use it before it was gone.”

Both McKee and Morris agree that the program would be most beneficial to the limited- and select-service hotel market.

The Senate bill was introduced in February by Sen. Mary Landrieu, D-LA, chair of the Senate Committee on Small Business & Entrepreneurship, and Sen. Jeanne Shaheen, D-NH. It is co-sponsored by both Democrats and Republicans, including Georgia GOP Sen. Johnny Isakson, a former businessman. “I understand how important the CREED Act is to small business. This legislation would allow thousands of small businesses across the country to refinance their loans, providing a greater opportunity to grow and hire employees.”

Read the article on Asian Hospitality here!