Financing is still available for hotel projects—for those who know where to look for it. The U.S. government, through the Small Business Administration and the Department of Agriculture, is an option for hoteliers who are in the market for a loan, and can offer some notable opportunities for hoteliers.
A recent webinar, sponsored by Liberty SBF, discussed the value propositions of SBA programs and what sets them apart from other types of financing. Moderated by Elaine Simon, senior managing editor of Hotel Management, the panel was comprised of Alex Cohen, CEO and co-founder of Liberty SBF; and Greg Porter, SVP of capital markets, HREC Investment Advisors.
Banks, CMBS and Debt Financing
The state of the hotel finance market is improving, Porter said, noting that the hotel finance market in 2020 was “pretty much shuttered.” Borrowers, he said, were negotiating forbearances, and when they needed to find a new lender, they were paying a 9 percent rate—“if they could find that. So we’re definitely in a better [position] today. Many lenders that were active in  have returned to the market.”
But it isn’t all smooth sailing. “Most bank lenders are looking to reduce their hotel exposure, not add to it,” Porter said. Some bank lenders will finance hotels—“conservatively”—for existing clients, he noted, and “a small handful” of bank lenders are writing conventional loans for new borrowers. But these are few and far between: “If you have a loan request in your market, you’re going to local or regional banks,” Porter said. “If you go to 20 lenders, you might find one or two that are offering conventional financing.” Borrowers for full-recourse loans could expect rates in the 4 percent range with 50 percent to 65 percent leverage and 25-year amortization.
Porter said commercial mortgage-backed securities lenders are “definitely back” for hotels that are “well flagged, well positioned and have strong trailing-12 cash flows. Rates for CMBS right now or in the “high fours to low fives,” he added. CMBS loans can be nonrecourse, and owners of newer hotels can secure a 30-year amortization.
Debt funds, meanwhile, are available in three- to five-year terms with nonrecourse bridge financing. “That market is definitely improved,” Porter said. Over the last six months, lenders have been seeking “value-add deals,” acquisitions that could be profitable following a turnaround. Rates for these funds are typically in the 5 to 6 percent range. “Most of the debt funds have a minimum $15 million loan size, so it’s for the larger deals,” Porter added, but acknowledged that some deals go for less.
Loans from the Small Business Administration may be attractive for recourse borrowers, Cohen said. Specifically, the SBA 504 program provides much higher leverage at what Cohen called “a very attractive cost from a rate standpoint” compared to conventional loans, CMBS and debt funds.
“Most of our borrowers are trading … recourse for super-high leverage [and] low-cost financing as well as a loan that allows you to execute a business plan like a [property improvement plan] or some [capital expenditures] upon acquisition,” Cohen said. Notably, an SBA loan could be used for ground-up construction, an acquisition with CapEx or refinances, a distinction from the traditional model of bridge debt for acquisitions and perm debt for other purposes.
The SBA, Cohen added, is “fairly generous” in terms of what they consider to be eligible costs, including land purchase, hard costs and some of the borrower’s closing costs. “We’re advancing on a total pie that is inclusive of all of the total costs that are going into the project, and the borrower is really only having to inject 15 percent equity against those total costs,” he said. “I think [this] makes the SBA 504 program, in particular, a very attractive program for hoteliers.”
By 2029, a projected 14.4 million middle-income seniors will live in the U.S., and 54% of them will lack the financial resources to pay for senior housing at the current market rate, according to a 2019 NIC-led study. While many operators and investors had traditionally focused on high-income consumers, the pandemic further propelled a shift in lender willingness to support the middle market. Our latest white paper, in conjunction with Senior Housing News, explores how operators can compete for the middle-market by taking advantage of government subsidies for senior housing properties and navigating the available financing options.
With recent rent and sales-price growth in multifamily housing and other commercial real estate sectors, mortgage brokers and lenders should be paying more attention to the use of bridge loans to help clients in need of short-term financing. Clients use bridge loans to support a project until they can secure permanent financing.
Also known as gap financing or interim financing, these types of short-term loans are popular with clients who are looking to quickly close property acquisitions and execute value-add business plans. These types of loans are often interim financing vehicles for multifamily homes or other commercial-property acquisitions.
Occasionally, such loans are used for cash-out refinance purposes, with the money going for rehabilitations or renovations, lease-ups or interest reserves. With quick closing periods and one- to three-year terms, bridge loans provide temporary financing until the borrower secures a permanent takeout loan with an agency, a bank, a commercial mortgage-backed securities lender or even the U.S. Small Business Administration (SBA).
As mentioned above, a main use for the loan is to put additional funds into rehabilitations and renovations. This allows property owners to raise rents, maximize proceeds and increase bottom-line cash flow which, in turn, increases a property’s overall value. Property owners or investors can then secure permanent financing at the new valuation and pull more cash out when they refinance out of their bridge loans.
Bridge loans have advantages over various loan programs from agencies such as Fannie Mae and Freddie Mac, the SBA and the U.S. Department of Housing and Urban Development (HUD). There may be a variety of situations that necessitate a quick closing, such as a hard deadline or a competitive bidding situation. A bridge loan may close in only a few days or weeks.
Conversely, the lengthy timelines and requirements for loan approvals from groups such as HUD and SBA can impede the timing of transactions. An SBA loan can take up to three months or longer to be approved while some HUD loans can take five months or more. A borrower also may encounter unexpected delays during the permanent loan approval process, which may result from issues with the property title, structural problems, environmental concerns or financial-performance issues.
These are some of the reasons why bridge loans may make sense for clients of commercial mortgage brokers. There are two types of bridge loans that are well suited to meet current market demands, particularly for smaller-balance real estate that is too small for debt funds or other institutional lenders.
Second, so-called “performance” bridge loans may be a better fit for quick-close deals or heavier-lift properties that don’t have in-place cash flows. These types of bridge loans can be used for acquisitions, rehabs, refinances and stabilization efforts, with up to 50% available for construction expenses. Pricing typically starts at 5.99% with up to 75% LTC.
Although bridge loans have many benefits, there are some important risks and potential drawbacks for borrowers to consider. Bridge loans typically have higher interest rates than other types of financing. They also are subject to floating rates, which are currently on the rise. For properties that experience a decrease in rent-growth rates, valuations level out after a period of increases. Additionally, lenders generally require strong credit and a certain level of in-place cash flow. If the borrower is unable to repay the bridge loan, the lender may be able to foreclose on the property used to secure the loan.
These types of loans play critical roles in the multifamily housing market, which many experts believe is poised for continued growth in 2022. For instance, Freddie Mac estimates 4% multifamily rent growth across all markets this year. The organization also expects to see overall multifamily origination volume to continue rising.
With rents continuing to climb and interest rates remaining low — but trending upward — investors will want to strike while the iron is hot. Bridge loans can close in less than 30 days, even before the next forecast rise in rates. At the same time, they allow multifamily investors to execute rehab and value-add plans for capitalizing on rent growth.
In addition to multifamily housing, the self-storage, health care and hospitality sectors also may benefit from bridge lending. While many industries have struggled due to COVID-19 cases, self storage has grown as more people transition to remote work or downsize their homes. According to StorageCafe.com, about 53 million square feet of rentable storage space was completed in 2021 alone. As a result, investors are gravitating toward self-storage deals to expand or improve existing operations. Bridge loans provide a deal structure that allows for quick execution, offering advantages for investors.
While the self-storage and multifamily housing markets are on the rise, the health care and hospitality industries are still recovering. There are distressed assets in these sectors that need short-term capital influxes to restore operations. With bridge loans, these businesses can make improvements and stabilize cash flows.
Bridge loans can be a valuable solution when lenders and brokers are discussing investment financing options with their clients. Quick closings, flexibility and non-recourse provisions can fit a variety of business-use cases and provide an influx of cash.
Partnering with an experienced bridge lender can help clients find competitive pricing and attractive deal structures. Select lenders will pay a fee to their referral sources on closed deals. Lenders and brokers should act quickly if their clients meet the requirements for a bridge loan. There’s no better time than now to take advantage as rates begin to rise.
Alex Cohen, chief executive officer of Liberty SBF, reviews current trends in demand for warehouse and industrial space, and how owners are acquiring financing in difficult times.
Demand for warehouse and industrial space remains robust across the country, with continued rent growth and higher prices per square foot, says Cohen. The capacity crunch has been driven by the fallout from COVID-19, as well as a general rise in e-commerce activity over the past few years and resulting supply chain congestion.
The situation is especially acute near major port areas, such as Southern California’s Inland Empire region, which supports the ports of Los Angeles and Long Beach. The same is true for parts of the country that are close to ports along the East Coast.
Cohen sees a shift in the dynamic between end-users of industrial properties and real-estate investors, with the latter beginning to eclipse the former in bidding for space.
A further trend in the market is the changing nature of the warehouse itself. In addition to the traditional regional distribution center, which might take up a million square feet or more, there’s growing demand for smaller facilities located closer to urban centers. That’s another result of the e-commerce boom, as retailers look to meet customer demands for rapid delivery of orders.
At the same time, says Cohen, many developers are reducing the portion of their properties devoted to office space and increasing that which is intended for warehousing and distribution use.
Opportunities also exist to convert retail properties into warehouse complexes in major metropolitan corridors, even to the extent of turning entire department stores or malls into distribution centers. But developers can run into re-zoning problems as they confront issues of traffic, congestion and noise close to residential neighborhoods.
Inflationary pressures are driving up property and development costs across the country, often making it a challenge to execute value-add business plans and secure financing. But there are strategies to close deals quickly, control costs for your construction project and stay ahead of the competition.
We partnered with Multi-Housing News on a free, informative webinar to give borrowers an insider’s view on what lenders are looking for.
Get insights into:
Outlook for the construction supply chain
Rising labor and materials costs: What’s the impact on underwriting?
How to mitigate inflation and get favorable loan terms
What makes a construction or renovation project attractive to lenders (and what they won’t touch)
Strategies for securing small-balance loans in a competitive market
Just as travel was again on the upswing, a new variant of COVID-19, along with the global rise of cases has created yet another revenue setback for hotel owners and a slowdown in business meetings, conventions, and vacations. Thankfully, there is a new financing opportunity that can help hotel owners save money, access cash for improvements, and stay afloat during these uncertain times for the industry.
A recent rule change from the Small Business Administration (SBA) allows hotel borrowers to refinance their floating-rate SBA 7a loan to a fixed-rate SBA 504 loan. This opportunity is phenomenal for nearly any small business, but it is especially beneficial for most select and limited-service hotel owners.
Why refinancing is a no-brainer
If you have a 7a loan, the SBA’s flagship offering, you’re in good company. The SBA created more than 40,000 7a loans in 2020 worth a combined $22.55 billion. These are the most common government-backed loans sought by hotel owners because they can be used for ground-up construction projects and cover all business expenses. Equity isn’t built fast in these loans, however, which makes them difficult to exit.
The SBA’s new rule allows borrowers to refinance into the lower-cost 504 loan with more existing debt than was previously allowed. SBA 504 loans have a fixed rate, lower fees than the 7a loans, and offer up to 90% leverage. Even better—and this is where struggling hoteliers can really use a boost—504 loans allow you to cash out up to 20% of the property value to use as working capital. The new rule no longer requires borrowers be current on all payments for 12 months before filing an SBA application.
Any hotelier that was hoping to execute property improvement plans (PIPs), business plans, or renovations now has a way to fund those plans while reducing their monthly payments. Previously, borrowers could only refinance half of their project’s debt, but this interim rule allows them to refinance the full 100%.
Rates about to rise even more
Interest rates have already ticked up from historic lows, and recent activity from the Federal Reserve suggests now is the time to pull the trigger on this opportunity.
Getting ahead of those interest rate increases will be important, because 7a loans usually have variable interest rates between 5-6% while a 504 loan has a lower, fixed rate. The SBA debenture rate for January is 3.21% fixed for 25 years. The sooner you refinance, the better savings you’ll see against the forecasted higher rates.
Choosing the right lender
Not all lenders are created equal, and you’ll want to engage with a company that can offer the proper guidance to meet your business needs. A non-bank lender can usher you through the process and help you understand which loan works best for your hotel. If you’re already working with a bank that knows what you’re trying to accomplish, it should also be able to help you find the best loan program.
Keep in mind that you’ll want to find a lender that has experience with 504 loans and has an existing relationship with both the SBA and the certified development companies (CDCs) in your state. Trying to work outside of that network can bog down the speed of executing transactions.
If the looming rate hike didn’t convince you that now is the time to execute, consider this point as well: The interim SBA rule that allows for this refinance probably won’t go on indefinitely. As the hospitality sector continues to try to rebound from the pandemic, the opportunity to refinance is here NOW and is too good to pass up.
One indicator that helps to predict the mortgage narrative is the consumer price index (CPI). Acting as a financial barometer of the inflationary climate, commercial mortgage lenders like to keep their eye on any changes to this inflationary measure.
With changes to the CPI, changes to lending rates will likely follow.
This year many in the commercial mortgage sector are in for a shock. At 6.8%, the CPI annualized increase represents its highest jump since 1982.
The lending goalposts are already moving to accommodate the almost certain rate increases predicted in 2022 based largely on this inflationary index.
Along with the CPI increase, commercial lenders are bracing for anticipated changes to the overnight rate dictated by the Federal Reserve. Any change in the overnight lending rate will directly impact floating rates on all commercial loan arrangements.
There are other inflationary pressures at play that are causing a domino effect. Inflationary indicators today lead to rate changes down the mortgage road.
Liberty SBF and many US-based commercial lenders are waking up to the CPI news with the realization that it is more than likely that the historically low rates that we have seen up until now will not stay this low forever.
As a result, Alex Cohen, CEO of Liberty SBF, is of the view that steps should be taken in the short term to help buffer clients against any potential new year mortgage rate increases fuelled by converging inflationary factors.
“I think that the inflationary pressures we face are very timely. The number that just came out is certainly a big one. We still must think that we are at the peak of the supply chain disruption. The costs of goods in the US are going up and the energy prices have gone up too,” Cohen pointed out.
While the CPI has been influenced by unique supply chain disruptions including backups at major US ports, the supply issues need to be corrected before there is any relief. Cohen predicts that we will not see this happen until well into 2022.
Providing possible answers, Liberty SBF is in the unique position of being able to work with the Government-sponsored Small Business Association (SBA), which means the lender can use this partnership to offer flexible loan options when floating rates start to rise.
Cohen and Liberty SBF are encouraging borrowers and investors to switch to Government-sponsored SBA fixed-rate loan options now, ahead of the predicted new year rate hikes. To achieve this seamlessly, Liberty SBF has set up a team to work with commercial real estate investors when refinancing into these low fixed-rate mortgage options.
“We are identifying borrowers now who can refinance when we are at the bottom of the rate cycle. We need to take advantage of this opportunity before the rates go up,” Cohen explained.
He went on to outline that “the SBA subsidizes two types of loan programs. One is called 7a and the other is called the 504. A lot of borrowers use 7a loans which are floating-rate loan options to build properties and, until recently, didn’t have the option for refinancing because they used a subsidized high-leverage loan.”
That was then and this is now. Cohen pointed out that, thanks to a recently passed Government rule change, commercial investors and real estate borrowers can now “refinance SBA debt into SBA debt”.
Cohen is excited about what this recent lending announcement represents for Liberty SBF and its commercial clients.
“We are reaching out to borrowers who currently have these floating rate SBA loans backed by real estate and providing them with some real options,” he said. “They can now refinance into a low fixed rate 504 option. We can secure for them a lower rate and if there is significant equity in their property, then a cash-out is typically on the table.”
This is welcome news for some of the clients that Liberty SBF works with that have built up considerable equity in their existing high-leverage loans.
“We are typically targeting borrowers who have been in their existing mortgages for three-plus years. These clients are successfully executing their construction plan and have completed a lease plan, and this builds significant equity value,” Cohen said.
New year commercial prospects
Despite recent financial indicators, Cohen continues to remain cautiously optimistic about commercial lending prospects leading into 2022. Other factors enter the mortgage game plan that go beyond anticipated rate changes and inflationary predictors.“
We are still seeing major rent growth moving into 2022 and demand for multifamily and single-family residential construction. We believe that the commercial construction market will remain strong,” Cohen predicted.
“Inflation is not the only input. We are still at all-time low rates and supply and demand factors are at play. We are very optimistic about the next couple of years. The macroeconomic shift may have caused folks to get a little bit more disciplined. If the market takes a disciplined approach, then there is certainly a lot of value yet to be created over the next two or three years.”
The COVID-19 pandemic has affected what kind of financing hoteliers can secure for their projects and how they can get that financing. During a recent webinar, a pair of economic advisors shared their insights on what hotel owners should know about securing funds now, and going forward.
Andrew Broad, principal at New York-based commercial real estate agency Avison Young, said that 2021 has been a “recovery year,” with leisure destinations across the country seeing a stronger recovery, which determines what kinds of assets are eligible for financing. “It’s what you are [and] where you are, and what’s available to you from a financing standpoint may depend upon that,” he said. “We’ve seen anything from bridge financing, to assuming financing, to a couple deals that we’re closing this month that we actually went out and got [commercial mortgage-backed securities] fixed-rate money.” The availability of capital has improved, he added, but where a borrower falls on that spectrum depends on what kind of asset the owner has, where it is located and what kind of money is coming in—or not.
Special servicers like Avison Young are getting “inundated,” Broad said, because many of the support systems hotels have needed in recent years fall into the special service category, including CMBS loans. The Small Business Administration, he added, offered “a lot of relief” to borrowers: “So the things you would have to normally do in a situation of distress from a balance-sheet lender standpoint, they didn’t have to do.”
Alex Cohen, Liberty SBF CEO and co-founder, agreed with “pretty much everything” Broad had said, adding that the interest rate environment for floating rate liabilities has assisted in buoying the market through the downturn. The company helped secure Paycheck Protection Program loans for “hundreds” of hotel owners across the country, he said, and a range of factors—including a “very supportive regime” from the Small Business Administration that allowed for payment deferments and a supportive balance sheet community also helped keep the industry afloat. “That being said, as we go into next year, we do expect to see some distress, particularly for assets that are not catering to the leisure market,” Cohen said. Assets in central business districts and downtown areas may continue to struggle, driving “distressed low-end sales.” On the other hand, he said, if interest rates do stay low and the lender community continues supporting hoteliers, the challenges could balance out. “Obviously, the market has underperformed, but in terms of distressed selling, that’s not something that we’ve seen to the extent that we saw in 2008 through 2010,” he said. “But I do expect that we will start to see that coming into next year.”
Broad, meanwhile, predicts some challenges with property improvement plan and capital expenditure liabilities—“coupled with the fact that a lot of folks in the industry accelerated depreciation.” The overall scope of PIPs has expanded and supply chain and inflation have similarly impacted the cost of those projects, he added. “So looking forward, there probably is some distress there that just hasn’t been recognized yet, and I personally think it’s coming down the pipe.”
Assets that have recovered to pre-COVID revenue per available room are assets will be able to get financing going forward, either through conventional channels or from the SBA. “We’re also starting to see that the capital markets lenders like CMBS are starting to come back,” he said. “Obviously, the amount of allocation that they’re providing to the hotel industry is smaller than it was pre-crisis but you know, we are starting to see liquidity come back into the market.”
“We do not want to compete with institutional market. We are supporting emerging sponsors. That is the business that we know and that is the business that we are good at,” says Alex Cohen, CEO of Liberty SBF, in this podcast interview. Liberty SBF is an active bridge lender, operating in the $5 million to $15 million price range across asset classes, which has been a sweet spot for the firm.
Like many lenders, the firm focused on PPP and other essential loans, but now that the pandemic has started to retreat, the firm is returning to its core business model, where bridge loans are at the epicenter. With so much capital chasing deals, there is plenty of demand. “We reverted back to our core lending platform in the late summer early fall, and we have just seen robust demand.”
Liberty SBF has a non-recourse bridge loan, which is in high demand. The firm takes a thorough look at the business plan, and is particularly attracted to deals that Cohen says require a ”heavy lift” meaning that they require a more involved renovation and a significant capital budget.
In an exclusive podcast interview on Globe St, Cohen tells all about the firm’s bridge lending activity, and why he is so bullish on the sector. Listen now.
With another fiscal year nearly over and the worries of COVID fading slightly, many lenders in the commercial sector are tracking new investor preferences as well as overall trends for commercial loan types to suit current market needs.
For Liberty SBF, renewed investor interest in commercial bridge loan opportunities is a big focal point.
As Alex Cohen, chief executive officer with Liberty SBF, pointed out to Mortgage Professional America, “We are back in bridge lending in a big way.”
Funding over $2 billion in loans to commercial property investors, as well as small to medium businesses, Liberty SBF’s business model rests firmly on a specialization in small-balance commercial lending for loans from $500k to $15 million.
While offering different types of conventional and government-guaranteed loans, Cohen highlighted two new bridge loan products that will be a primary focus for Liberty SBF in 2022 based on increased market demand.
Light lift bridge loans
Recognizing the upswing in investor interest in bridge loan options following a noticeable dip in overall bridge loan activity during COVID, Liberty SBF recently announced the introduction of a bridge loan product catering to an untapped niche in the market.
“This is a non-recourse, floating rate bridge loan for financing ranging from $5 million to $15 million and I think that the big hallmark of these deals is that they are smaller balance,” Cohen explained.
Strong fundamentals for commercial real estate, new and enhanced loan products have emerged.
“These loans are non-recourse – the collateral for the loan is the property rather than the borrower – and they fall in the 5% range in terms of rates,” Cohen added.
The feature, however, that enables Liberty SBF’s light lift loan to stand out from other bridge loans on offer comes down to the size of the deal.
Most bridge loans with similar features cater to the $10 million-plus market. Liberty can go down to the $5 million level, which is better suited for smaller to medium businesses’ financing needs.
“There are a lot of debt funds out there providing non-recourse financing like this. I think the size of our loans differentiates us from other debt providers in the market for this type of product,” Cohen reflected.
“The big caveat is that we need to see some in-place cash flow for those property types for a borrower to qualify for those types of deals. Most of the collateral relates to multifamily with some exposure to commercial and hospitality,” Cohen further highlighted.
He illustrated that the bridge loans can be used for various purposes. “Whether it be for acquisition or refinancing, a borrower is executing some sort of business plan. These are primarily deals that have some sort of cash flow in place.”
Heavy lift bridge loans
Contrary to the lighter lift option product offered by Liberty SBF, the second bridge loan option starts at a higher price point; however, there is no requirement for in-place cash flow.
This product is geared more towards construction, specifically for adaptive reuse purposes, or quick closes, and is considered a heavier lift loan.
“Although we see the need for ground-up construction, we are more focused on financing towards converting an existing structure into multifamily. For example, we’re starting to see some interesting opportunities in the realm of hospitality-to-apartment conversion,” Cohen stated.
If the borrower presents a more extensive business plan, Cohen explained, Liberty SBF is well-positioned to offer financing options to address the investor’s specific requirements.
“We are excited about those types of opportunities. There is a strong demand for heavier lift bridge loan products in the market. The whole realm of commercial financing is in such high demand right now,” Cohen summarized.
The year ahead
Currently, there are several factors driving the commercial sector. Chiefly, low interest rates and the continued need for rental opportunities, as well as distinct housing shortage across the country.
Even with a slight upward trend in interest rates in the new year, Cohen predicts that commercial lenders will see bright prospects on the lending horizon. The main trends that are influencing the mortgage sector today will likely continue well into the new year. Construction demand will remain high, as well as the need for financing solutions to address housing needs.
“We are excited to continue to look at opportunities. We have a small window of opportunity between now and the end of the year to close loans that hit our pipeline. Beyond this, we are certainly optimistic as we move into the first financial quarter of 2022,” Cohen concluded.
The COVID-19 pandemic has presented many challenges for special-use commercial property developers and businesses of all sizes and sectors. In response, the government committed to a range of subsidies, from the Paycheck Protection Program, which ended in May, to loan deferrals. Recently, the U.S. Small Business Administration made some big news for developers and small businesses.
With legislation introduced at the end of July, borrowers now have a tremendous opportunity to find new value with their investments by refinancing floating rate SBA 7a construction loans to preferable SBA 504 fixed-rate loans.
Capitalize on Rates While They’re Low
Home refinancing has been very popular recently due to historically low interest rates, and the same can be said for certain developers of hotels, self-storage, health care facilities, and businesses who have developed build-to-suit office, warehouse and other commercial properties. SBA 7a loans typically have variable interest rates between 5% to 6%; by refinancing to an SBA 504 loan, borrowers not only can get a lower rate, but also a fixed rate.
This aspect can reduce monthly payments and protect the bottom line from variability in the months ahead.
The SBA’s 7a loan is its flagship program—typically used for ground-up construction to develop a new property, or to finance working capital—and in 2020 the SBA created roughly 42,000 7a loans worth a combined $22.55 billion. However, since building equity does not happen so quickly, the 7a is a high-leverage loan that often takes a long time to exit.
An SBA 504 loan tends to be used for commercial real estate financing and has the benefits of a fixed rate, as little as 10% down, lower fees than a 7a loan and the ability to cash out up to 20% of property value for working capital.
The SBA’s new legislation adds to those benefits by providing the option to refinance up to 100% of a project’s debt instead of the previous 50% limit, and removes a requirement that borrowers must be current on all payments for at least a year before filing an SBA application.
Leverage Lender Resources
If a developer have an established relationship with a bank, it’s best to consult with them to ensure they are participating in the best loan program for them. If they do not have a strong relationship with their current lender, consulting with a non-bank lender will allow them to better understand your options.
With a lender that is acutely familiar with 504 loans, and has pre-existing relationships with the SBA and the state’s certified development companies, companies can realize benefits in the speed and certainty of execution as they refinance.
It’s important to act now. Although the SBA didn’t offer an expiration date for its new legislation, the offer to refinance likely won’t be indefinite.
It can be hard to get financing in a world where COVID-19 has disrupted business and capital markets are choosy about which industries they’re focusing on, so the latest government subsidy comes at a helpful time. Small businesses are always looking for opportunities, and this is one that shouldn’t be passed up.
One of the ongoing challenges faced by manufacturers is knowing when and how to invest in business real estate and related resources that can help keep the business competitive. One option is an SBA 504 loan. These loans are available to for-profit U.S. companies that have a net worth of less than $15 million and an average net income of less than $5 million.
These loans, which are regulated by the Small Business Administration are available from organizations like Liberty SBF. The company services 504 loans ranging from $1M to $15M, and has funded over $2 billion in loans to small and medium businesses with programs that offer significant cost and flexibility benefits.
To help get some clarity and advice on optimizing 504 loans, Manufacturing.net spoke to Liberty SBF’s Alexander Cohen. Watch the 5-minute video.
Senior living providers and investors are familiar with the financing options from Fannie Mae, Freddie Mac, and HUD. Less well known are the government-subsidized loan programs for healthcare facilities through the U.S. Small Business Administration (SBA). Liberty SBF is a specialty finance company that offers SBA, conventional and bridge loans.
NIC Chief Economist Beth Mace recently discussed the SBA program and other financing options with Alex Cohen, CEO at Liberty SBF. Here is a recap of their conversation.
Mace: Can you tell our readership about Liberty SBF?
Cohen: We launched the firm in 2011 and have been lending through several business cycles. We work with a lot of businesses that are buying or refinancing real estate for their companies, or what we call owner-user commercial real estate finance. We have closed more than $2 billion in commercial real estate loans. One of the eligible asset classes is healthcare, including skilled nursing, assisted living and memory care. When we first launched the firm, we were co-lending with the SBA and financed a decent number of assisted living and skilled nursing facilities and that’s how we were introduced to the asset class. We now have a full range of loan products for healthcare facilities and medical practice owners.
Mace: What distinguishes Liberty SBF from other lenders? You are a non-bank lender. What does that mean?
Cohen: We are a specialty finance company, a non-depository lender. We do not finance our operations through deposits. We have private equity and institutional investors who invest in our assets, but we are not a bank. That gives us some flexibility in terms of the deals we can underwrite. It allows us to operate in an area of the credit space where banks might not feel comfortable during choppy times. Certainly, the last 18 months have been choppy considering COVID-19, but we have continued to lend in the healthcare space. Compared to other specialty finance companies, we tend to provide loans for assets in the $2 million-$20 million range. We are focused on lower middle market or small balance commercial loans.
Mace: Is your cost of borrowing higher or lower for a borrower than that of a conventional bank?
Cohen: We offer some very attractive rate products. The way we finance these products is very efficient. On the permanent financing side, we can offer very attractive high-leverage, low-cost products. Some of our larger permanent financing deals are being priced in the high 2%-3% with up to 80%-85% leverage. That’s very attractive financing for these healthcare facilities which are an eligible asset class for government subsidized or quasi-subsidized programs. We tend to work with the SBA. Some of its offerings beat comparable offerings from HUD, Fannie Mae, and Freddie Mac. The SBA programs aren’t as well known in the sector. We are trying to educate the healthcare facility owner community about other financing options available for ground-up construction, transitional type business plans for existing assets, or permanent financing for stabilized properties.
Mace: What types of loans do you provide?
Cohen: We offer SBA, conventional, and bridge loans for healthcare facilities. One of the most attractive loan products we offer is the SBA 504 loan. Facility owners can get up to 85% loan-to-cost financing through the SBA with Liberty SBF as the co-lender. The loan can be used for ground-up construction, for example, and the borrower can secure up to the total cost of financing. It is a recourse loan. The way the program works, we partner with a Certified Development Company (CDC). A CDC is a nonprofit organization that promotes economic development within its community through 504 loans. CDCs are certified and regulated by the SBA, and work with the SBA and participating lenders, such as Liberty SBF, to provide financing to small businesses. The CDCs underwrite the loans with us and submit it to the SBA. When the loan is authorized, we fund the entire project. The SBA takes us out either at completion of construction, or shortly after the loan closes.
Mace: Is the process similar to the way Fannie Mae and Freddie Mac partner with Delegated Underwriting and Servicing (DUS) lenders?
Cohen: Each government program works a little differently. There are many CDCs, and we work with the largest ones. CDCs also work with other state and local subsidy programs. The CDCs are typically well versed on healthcare facilities. We manage the process, not the borrower, so it’s pretty seamless. And because we’re specialists, we can get these deals done in 45-60 days, whereas a large bank lender may take 90-120 days to close.
Mace: When you say healthcare facilities, can you define the types of assets?
Cohen: The types of assets we finance are assisted living, skilled nursing, memory care, and rehab facilities. The assets typically have a higher acuity of care. We also finance medical office buildings, which are eligible under the SBA program. Active adult and independent living properties would be considered investment real estate from our perspective. We do offer bridge lending on multi-family properties, including some age-restricted senior housing.
Mace: Do you offer conventional and bridge financing?
Cohen: Yes, we offer conventional and bridge financing. Our leverage is not as high with those products. But our borrowers can obtain permanent financing through our conventional offerings.
Mace: Do you finance the operations/cash flow part of the senior housing business or just the real estate?
Cohen: We only finance the real estate.
Mace: Were you active lenders during the pandemic?
Cohen: We were very lucky. We were designated as a Paycheck Protection Program (PPP) lender. We made PPP loans to a lot of companies in our servicing portfolios as well as to new businesses. We financed close to $200 million in healthcare-related businesses and financed about $1 billion in total for all types of companies. We were able to help healthcare borrowers, including our own existing borrowers, to weather the storm. Our bridge loan business has been active, helping owners refinance their facilities at a lower leverage point. The PPP program was successful and popular with borrowers. Now, we are working through the PPP forgiveness process with our borrowers and new customers. They must demonstrate the funds were used for legitimate operating expenses. And at that point, the loan becomes a grant that is tax free income for the business. Facility owners, particularly smaller, closely held healthcare facility owners, should keep in mind that the SBA was chosen as the vehicle through which the government provided stimulus to the entire business community, not just small businesses. The SBA has provided loan and fee deferments, and some rules have been changed. For example, borrowers can refinance SBA and HUD debt into an SBA 504 loan, an option that was not available before. It can be an opportunity for borrowers to pull cash out and lower the interest rate. Also, the government continues to provide other subsidies to healthcare facility providers, through programs such as the Provider Relief Fund. We have a great originations team, and we can be helpful if anyone has questions on the programs.
Mace: How large is Liberty SBF’s book of business for senior housing?
Cohen: Our servicing portfolio is several billion dollars. Our goal, as we transition from PPP to core lending, is to deploy about $100 million-$150 million between now and the end of the year. We have a number of healthcare transactions in the pipeline. There is a lot of interest from borrowers who believe we are at or near the bottom of the rate cycle and want to take advantage of the low-cost financing.
Mace: Has your bridge lending program been especially active during the pandemic? Why is that?
Cohen: Yes, our bridge lending program has been active. Borrowers with loans at maturity on their existing conventional debt or with an underperforming asset are taking advantage of bridge financing to reposition the facility. Or perhaps a buyer making an acquisition needs a bridge loan to execute a business plan to improve the census or put CapEx into the building to stabilize the property to get permanent financing or sell the asset.
Mace: Do you offer non-recourse bridge loans?
Cohen: We do offer non-recourse bridge loans. They are typically larger in size than recourse loans. Non-recourse bridge loans range from about $5 million to $15 million, with about 65% loan-to-value.
Mace: Broadly, what do you look for in a borrower?
Cohen: Operating experience is key. What is their operating experience for these types of facilities and sizes? Do they understand the market? Are they in town? We look at the borrower’s net worth and liquidity relative to the loan amount we are making. We focus on the recourse guarantors—ultimately the owners of the business—and the non-recourse carve out guarantors.
Mace: Do you often turn anyone down?
Cohen: We look at deals all day long. We are focused on originating deals that fit our credit box. We offer a large swath of products to the industry and can cater to different borrower profiles. Certain situations are not financeable for us and those are deals we cannot move forward with.
Mace: Where do you get your lending ability from? Institutional groups? High net-worth individuals?
Cohen: Our limited partners are primarily family offices. We have a well-capitalized operating company. The decision makers at our company are principals and managers. We were successful with the PPP program, and we are deploying that capital back into the market through our core programs with our limited partners and other institutional investors. They are very aggressively seeking investment opportunities at this point. We feel good about our capital position and our ability to lend.
Mace: What else would you like to share with our readership?
Cohen: I’m looking forward to the NIC Fall Conference in Houston. If anyone would like to set up a meeting during the Conference, please contact us.
Value-add apartment investors are back in action, and they are driving a boom in the bridge lending market. It’s all thanks to the great migration during the pandemic. As people traded urban living for secondary markets, including tech hubs, apartment rents in small metros and suburban markets climbed to record heights—and the trend hasn’t stopped in 2021.
“Rent growth has supported transitional business plans where sponsors are buying properties with the idea of investing additional capital into those properties or executing a rental increase plan,” Alex Cohen, CEO of Liberty SBF, tells GlobeSt.com. “We are seeing a lot of bridge demand from borrowers that are executing on those types of business plans.”
In the current market, value-add business plans are most viable for mid-tier investors focused on properties in the $5 million to $25 million price range and located in cities with strong rent growth. “We tend to finance what we call emerging institutional sponsors,” says Cohen. “Those are middle market investors that have 10 to 15 projects under their belt.”
There is liquidity to meet the demand for bridge loans, but Cohen says that it is limited, especially compared to other areas of the market, like core and core-plus investment. “Liquidity in this area in the market, particularly for non-recourse loans, is not as deep as in the institutional market,” he says. “That is where we think believe we can add a lot of value compared to debt funds and institutional investors, that’s why we play in that space.”
For that reason, securing a bridge loan on a value-add deal takes a strong business plan, and more importantly, a realistic gauge of rent growth in the market. Cohen is bullish on long-term rent growth, but he also doesn’t expect the same rents to increase at the same velocity as they have for the last year. “We believe that we will continue to see increased rent growth, but it will plateau,” he says. “Borrowers need to understand the rent growth story in the submarket where they are operating, and they need realistic pro forma rents with realistic operating expenses.”
Rising interest rates—which many experts have come to expect—could derail the activity in the value-add market. However, Cohen says that the foundational supply-demand imbalance in multifamily will keep fueling rent growth, serving as a strong counterbalance to rising interest rates. “The market is closely watching interest rates, and conventional wisdom would suggest that a rising rate environment and rising inflation would put negative pressure on asset prices, but I think there is a fundamental story here that will continue to support asset growth, particularly in emerging markets for the next two years,” says Cohen.
Late July brought significant change to the commercial lending space with a highly impactful announcement by the Small Business Administration (SBA).
For the first time, the SBA announced the opportunity to refinance 7a loans into 504 loans. Commercial real estate investors often utilize high-leverage, floating-rate SBA 7a loans to finance construction projects but find themselves without an easy exit strategy.
This rule change enables borrowers to refinance into an SBA 504, another high-leverage, government-guaranteed loan with a low fixed rate. Refinancing can potentially save thousands of dollars on interest, plus allows cash-out for working capital.
For Liberty SBF, the proposed changes were welcome news. With a client base made up of investors and businesses eager to refinance out of SBA 7a loans into low-cost, fixed-rate SBA 504 loans, this change has opened more doors for potential borrowers as well as generated a great deal of interest and direct referrals from brokers in the mortgage community.
“This is a really big deal. Any borrower in that high leverage (SBA 7a) loan should be thinking of refinancing, because theoretically there should be very little out-of-pocket expense. Most of the fees can be capitalized into the new loan,” Alex Cohen (pictured), chief executive officer of Liberty SBF, explained.
“Brokers and mortgage professionals who work as intermediaries should be thinking about their 7a clients who can now refinance into high-leverage, fixed-rate SBA 504 loans. We believe that this is a total of around $100 billion to $200 billion in outstanding volume,” Cohen continued.
Liberty SBF hit the ground running in anticipation of the SBA announcement. To capitalize on the significant change for high-leverage small business loans, Liberty SBF set up a team dedicated to pursuing this opportunity and have been growing this team over the month since the proposed change took effect.
How has the announcement panned out so far? “We have already been successful in signing up several deals. We are working with a lot of referral sources in the mortgage community that send us transactions. It has been a big deal for them,” Cohen stated.
Liberty SBF has also introduced additional bridge and construction options to participants in the mortgage industry with the launch of a bridge loan platform.
On the heels of such welcome news in the commercial lending space, Liberty SBF is now able to offer its client base a new bridge loan option that is generating buzz in the industry.
“This second loan appeals to institutional investors. Debt funds and institutional lenders typically do not lend below $10 million or $15 million per transaction. With our bridge option, we will go down to $5 million. We can now offer a low interest rate for deals between $5 million and $15 million that have in-place cash flow,” Cohen stated.
Cohen further explains that Liberty SBF can offer two options: a “heavy lift” bridge loan, which is geared toward construction for borrowers with less in-place cash flow, and a “light lift” bridge loan, which suits projects with more in-place cash flow and offers the most competitive non-recourse pricing available on the market.
Aside from the ability to go down to the $5 million mark, what other advantages does this bridge loan carry?
Cohen doesn’t hesitate to answer. “It is low-cost, high-leverage, and non-recourse.”
In simple terms, Cohen explains that Liberty keeps a competitive edge by offering lower rates, which range from 5-6%. Additionally, the loan-to-cost ratio can be as high as 80% and the borrower is not personally liable aside from fraud (the collateral for the loan is the property, not the borrower).
What is down the road for commercial lending?
With new construction not expected to slow down any time soon, the odds are in the commercial lending space’s favor.
“We feel that there are strong fundamentals for commercial real estate. There are a lot more people than housing and apartments in most markets across the country. Over the next two to three years, we will be watching rates very carefully. If there is an opportunity to refinance at a fixed rate, now is the time to do it because we are at the bottom of the rate cycle,” Cohen explained.
Cohen added: “We are bullish in the one-to-15-million-dollar space, which is the size we play in and eligibility for these loan products. Both are predicated on a resilient real estate market.”