Small Inn and Bed and Breakfast Industry Articles
Proposed changes to SBA loan limits bring new options
August 2, 2010
By Victoria Burt
The Small Business Administration, and specifically its 504 loan program, lends itself to owner-operators in the hotel real-estate business because hoteliers with a small portfolio generally meet the net worth and income guidelines set by the SBA.
New legislation proposed by President Obama and passed by the House of Representatives would raise loan limits and ease requirements for borrowers.
For example, a typical CDC/504 loan might be structured this way: An owner brings 10 to 15 percent equity to the table. The first-mortgage bank approves a loan for 50 percent. The SBA piece then covers the remaining 35 to 40 percent and underwrites the loan.
Right now, limits on the SBA piece of a CDC/504 loan vary, but for hoteliers, it caps out at $2 million, which means the total investment is a maximum of about $5.7 million. If the legislation raises that maximum to $5 million as proposed, the total loan available for investment goes to about $14.3 million.
“It really makes a big difference in the limited-service space as you go from economy to mid-scale properties,” said Walker Geyer, managing director of capital markets at Paramount Lodging Advisors. “It also allows buyers to look at properties located in a more expensive geographic area.
“To get a CDC/504 loan, buyers go through a non-profit Certified Development Company,” Geyer said. “There are about 270 CDCs nationally that act as the intermediary for underwriting the SBA loans in the 504 loan program and work directly with people like me that are functioning in a brokerage capacity.” The CDC works with the bank to secure the first mortgage.
“There are a significant number of banks that participate in the SBA 504 program because their exposure is limited to just 50 percent of the total cost of a project. So it’s an attractive bank lending area. And then the SBA also underwrites the loan. So you basically get approval on the loan from both the bank and the SBA,” he added.
For energy-efficient or Green 504 loans, proposed changes increase the loan limits to $5.5 million. The basic requirement for a green loan is an energy savings of 10 percent annually that a new owner will bring to the property. “This is something the SBA would look at prior to loan approval,” Geyer said. “Someone acquiring a hotel can look at all of the different options out there for reducing energy consumption, whether it’s with the HVAC units, lighting, etc. There are a number of places for a property, particularly with an incentive, to make the added investment.”
If the Senate and President Obama approve the legislation, which is pending at press time, small business owners will get the chance to tap these expanded limits. H.R. 5297: Small Business Jobs and Credit Act of 2010, has several potential benefits, hoteliers say. If passed it will:
- allow an SBA refinance with the 504, which would allow those with balloons coming due to refinance their commercial loan;
- increase 504 loans from $2 million to $5 million for regular projects, and from $4 million to $5.5 million for manufacturing;
- increase energy-efficient or Green 504 loans to $5.5 million;
- increase the maximum SBA size limits for an eligible business to allow larger businesses to qualify;
- increase SBA microloans from $35,000 to $50,000;
- increase the maximum on 7(a) loans from $2 million to $5 million; and
- re-up the guaranty to 90 percent for SBA 7(a) loans.