October 28, 2010 3:45 pm
Most of us in the hotel bidness have heard or read about the new SBA 504 and 7 (a) enhancements passed recently in HR 5297. The highlights of the bill increased the maximums under the SBA 504 and 7 (a) loans to $5 million. In the case of the 504, the $5M maximum (for hotels) could translate into a total deal size of $12M. For example, using the 504 program, 40% of the deal would come from the SBA debenture, 40% from the primary lender and 20% from the investor. (Currently, we are seeing most 504 lenders require 20% down for hotel deals). In some instances, you may find a lender willing require less than 20% by using the 7(a) program, but it would depend on the lender, and would be unusual. One very important point that has been overlooked is the fact that the increased limits for 504 will reopen the door for those investors who are at their $1.5 to $2M dollar limits. In other words, if you now have an SBA loan and your SBA portion is at or near $2M, you now will have another $3M of eligibility with the 504 program.
In addition to the above, the fees for both programs have been reduced or eliminated until the end of 2010. Many folks we talk to do not like the brain damage it takes to work with the SBA. But in today’s lending environment, use of the SBA may be the only way to purchase a hotel. In addition, the SBA requirements are similar to those found with a traditional loan. Besides, if you use a CDC (Community Development Corporation) that knows what they are doing for hotels and the 504 portion, the application process is simply a matter of following the steps, just like any other loan. Another “bang for your buck” feature is the interest rates on the 504 debenture, which are as low as I have seen them in 20 years. Anytime one can get an interest rate, fixed for 20 years, at less than 5% APR, it creates an opportunity.
Based on the state of the market and the new higher limits for these loans, I would be looking for opportunities to buy. If you have seen anything different in the lending marketplace, I would love to hear about it..