Conditions Favorable for Penciling Out Middle-Market Senior Living

Originally published on Senior Housing News

The middle market is one of the biggest opportunities in the senior housing industry, and conditions may be particularly favorable at the moment for operators and capital providers to embark on projects.

The reward for senior living companies that can carve out a working middle-market model is that there is a rapidly growing group of older adults in great need of those services at this price point. To attract them, operators must charge a low enough rate that middle-income residents can afford, but one that is high enough to carry the right margins to make it a profitable endeavor for operators and owners alike.

But there are some companies focused on senior living that are blazing new trails in the middle-market space today by tweaking how these communities are financed and built.

They include Lloyd Jones, a Miami-based real estate investment, development and management platform that is actively forging a new middle-market model under the umbrella of its Aviva brand; and Innovation Senior Living, a Winter Park, Florida-based company that pivoted to serving middle-income older adults under an owner/operator approach earlier this year.

Before the pandemic, some senior living capital providers might have looked at middle-market senior housing as an emerging or niche product type. But Covid-19 has led to a wave of disruption, and lenders such as Liberty SBF see current conditions are more favorable for middle-market senior housing than before the pandemic.

“There are better opportunities to acquire properties at a lower basis, which makes executing on those types of business plans more realistic and less risky,” Liberty SBF CEO and Co-Founder Alex Cohen said during a recent Senior Housing News webinar.

Lloyd Jones COO and EVP of Senior Living Tod Petty believes that the middle market is the industry’s “opportunity of a lifetime.” And, he thinks it’s a product type that providers have the tools to reach.

“Some say it’s a mystery, and we may never figure it out,” Petty said during the webinar. “But I think we’ve been doing it all along.”

Middle-market strategies

Part of what makes the middle-market opportunity so attractive is the fact that many senior living communities are trading at a discount to replacement costs, given the level disruption that Covid-19 has brought.

Looking across the market today, Petty believes that the greatest opportunity to serve middle-income seniors is by acquiring properties at a good price and transforming them into middle-market senior housing. As many as 70% of the communities Petty sees on the market are “tired and old,” and have been starved of CapEx. Typically, they are owned by real estate investment trusts (REITs) who “want to dispose of them at very nice prices,” he said.

“For someone that has the vision, the wherewithal, has done it before and has a creative, vertically integrated platform, then this building can be bought, repurposed and put back on the market,” Petty said. “You will fill up because you’ll capture 40% to 60% of the market that is unserved, plus you’re going to get the baby boomers that don’t want to spend their fortunes.”

Cohen agreed that there is significant opportunity to acquire older distressed assets, not only from REITs but from private equity investors or mom-and-pop owners.

“That is exactly the type of business plan that we’re looking at and financing through our bridge product,” Cohen said. “Between now and the end of the year, I would anticipate doing somewhere in the neighborhood of $102 million to $150 million in core lending.”

Lloyd Jones is looking to meet the middle market in a few ways. The company is buying distressed hotels and converting them into senior living as well as picking up distressed and even Class A senior housing assets at a good price. Lloyd Jones is also developing ground-up “independent living light” communities where residents can age in place through the use of technology and partnerships with service providers.

Petty stressed that being vertically integrated is a big advantage for serving the middle market, and that operators need to be “lean and mean” when it comes to operations. He compares a middle-market senior living community to a boutique bed-and-breakfast — not as fancy as the Ritz-Carlton, but still charming in its own way.

While some newer communities have dropped their rates closer to the middle market to compete in the Covid recovery period, Petty believes those rates will rise again as capital providers seek to meet debt service ratios. And that will leave middle-market communities at an advantage.

“This product will be in a great position to thrive, because it will be affordable,” Petty said.

Petty expects Lloyd Jones will close on four acquisitions and start work on two ground-up developments by the year’s end, with a goal of adding about 1,000 units to its portfolio each year.

Innovation Senior Living takes a similar approach as Lloyd Jones by acquiring “tired, 20- to 30-year-old properties,” CEO Pilar Carvajal said. Currently, the company owns and operates three communities, with two more communities likely to come online by the end of the year. But CEO Pilar Carvajal would like to grow the operator to about 12 to 15 communities in about five years’ time, with the middle market as a specialization.

Carvajal comes from the subsidized housing world — and she sees some overlap between housing meant for low- and middle-income seniors.

“It’s very heavy on the operations, very strict expense control,” Carvajal said during the webinar.

Indeed — echoing Petty’s point that “we’ve been doing it all along” — she emphasized that her career has been focused largely on serving the middle-market, and that foundational operational approaches and financing structures to grow this sector of the industry are already in place.

Underpinning the company’s middle-market model are universal workers who can do many tasks in a community. Carvajal added that the operator is constantly negotiating its prices with vendors for goods and services, such as payroll, food and medical supplies. Using those strategies, the company can achieve “pretty good operating margins,” although not to the level of other high-end properties. Still, that can be enough for capital providers to get on board with a project.

“You can be profitable, and you can serve a population that has been largely neglected, that needs our help and that hasn’t seen their place in our industry — ever,” Carvajal said.

What lenders want

As a non-bank lender, Cohen said Liberty is more open now to “business-plan focused financing opportunities,” such as middle-market conversions or ground-up construction projects, with one opportunity being its small business administration loan product. The firm is also again underwriting conventional loans and bridge transactions outside of SBA.

When looking at operators to partner with, Liberty’s preference lies in those who come to the table with a few projects under their belt.

“We’re going to want to make sure that there’s operating experience in executing specific type of business plans that the borrower is currently seeking,” he explained. “As well as the … net worth and liquidity that are going to support that type of project.”

When underwriting new financing, Cohen said Liberty examines how a property or operator performed before the pandemic, and whether they can see a clear trajectory to return to those conditions in the months ahead.

“It really comes down to, what did the census look like before Covid and what is the trajectory in the last six to nine months?” Cohen added. “Savvy operators are figuring out ways to mitigate downside risk as waves continue to hit … and we’re excited to partner with folks who have been able to do that.”

Liberty is currently lending up to 85% of cost for SBA loans, including on ground-up construction deals. On the conventional side, the company is a little more cautious, with loans at about 65% to 70% loan-to-value, depending on the operator and product type.

Most of the deals that Liberty is looking at today are opportunistic acquisitions of distressed senior housing assets, as well as refinancings. And looking ahead, Cohen believes the market will continue to stay choppy and therefore that banks will continue to be cautious in looking for new projects to partner on.

In the meantime, he sees a lot of capital sitting on the sidelines, and lenders and equity investors are looking to deploy it where they can.

“We didn’t see the same types of underwriting miscalculations that occurred during the last recession, and we don’t see the same kind of oversupply of inventory,” Cohen said. “We think now is a good time to be investing in the sector.”


Commercial Mortgage Alert Features Liberty SBF Bridge Loans

Non-recourse bridge loans now available to middle-market CRE investors seeking financing from $5-15M

In response to strong borrower and investor demand, we recently announced a new bridge loan product for middle-market CRE investors, a group which previously had few quick-close financing options to choose from.

Our non-recourse bridge loan product provides 2- to 3-year financing terms for multifamily and commercial properties from $5-15 million, advancing up to 80% loan-to-cost with pricing starting at L+450. The Senior financing product enables investors to close more quickly on a new acquisition than with permanent financing. To qualify for a non-recourse bridge loan, which is akin to larger collateralized loan obligation (CLO) offerings, borrowers must meet an in-place cash-flow requirement.

Read the feature in Commercial Mortgage Alert or on Globe St.

“With increasing competition for assets and a need for financing opportunities for the middle market, our new bridge loan product presents CRE investors with a remarkable opportunity to secure short-term financing and seize opportunities fast,” says Alex Cohen, CEO & Co-Founder. “There has been growing interest from our broker and borrower community in this product, as there are very few non-recourse bridge options available at this price point for loans between $5-15 million. We’re proud to make this available to borrowers and brokers and help fill a void in the market.”

In November 2021, we provided a $5.2 million first-mortgage bridge loan for the acquisition of an industrial property in Las Vegas, Nevada. The borrowers had to close the acquisition financing quickly to take advantage of a below-market price on the asset. At the time of the acquisition, the property was 45% occupied.

With a best-in-class sourcing and loan servicing platform, we’ve closed over $750 million in commercial loans in 2021 to date, providing loans to middle market and emerging institutional borrowers at competitive rates and leverage.

Through our broker incentive program, we partner with brokers to facilitate bridge loans for their clients and earn referral fees. We close deals in 45 – 60 days after receiving a signed term sheet and deposit. For a premium, we can close loans in as few as three weeks.

Learn more about our middle-market bridge loan platform by clicking below.

Learn More About Bridge Lending


We never stopped lending! Liberty SBF closes $350 million in loans in first half of 2020.

Liberty SBF Holdings LLC, a small balance commercial real estate lender, is excited to announce it has closed $350 million in loans in the first half of 2020. The company, which provides SBA and conventional loans for industrial, storage, office, and healthcare properties, is now relaunching its bridge lending platform to provide short-term financing for multifamily and commercial properties from $1-$10 million.

“Liberty SBF took a disciplined credit approach during the last cycle,” said Alexander Cohen, CEO. “When COVID-19 hit in March we avoided margin calls and poor asset performance, which sidelined other lenders, and we were able to execute for our borrowers and referral sources through the first half of the year.”

The company also announced it has promoted Varan Rakhra to lead its national loan origination efforts as Director of Sales & Business Development. Mr. Rakhra’s team of lenders is eager to consider opportunities nationwide.

“Borrowers want to capitalize on historically low rates and they want to acquire properties at discounted prices,” said Mr. Rakhra. “Liberty SBF never stopped lending so we can provide capital right now.”

Liberty SBF Commercial Property Loan Funding

Liberty Small Business Financial provides up to 90 percent loan to value (LTV) financing through the SBA 504 program. SBA rates have dropped to historic lows, recently touching 2.25% for a 25-year fixed rate. For investors seeking bridge loans, Liberty SBF provides financing up to 65% LTV. Liberty is writing loans from $1 to $10 million. Hospitality properties are not currently eligible for loans through Liberty SBF.

Liberty SBF was founded in 2011 and has closed more than $1 billion in commercial real estate loans since its inception nearly 10 years ago.

Backed by some of the nation’s leading private equity firms, Liberty SBF has an innovative platform incorporating predictive intelligence and superior technology. For more information, visit LibertySBF.com.



Fixed-Rate CRE Loans at All-Time Low | 25 Yr Fixed | Now 3.63%

Debenture rates for SBA 504 loans have dropped below 4% this month, reaching all-time lows.

 SBA 504 Loan Rates:

  • 25 Year Effective Rate: 3.63%
  • 20 Year Effective Rate: 3.53%
  • 10 Year Effective Rate: 3.92%

Financing available for owner user industrial, owner user office, healthcare, self-storage, and hospitality properties.

Earn up to 2 points paid at closing by Liberty SBF

  • Up to 90% LTV
  • Long-term, low fixed rates
  • Close in 45-60 days!

Get Your Deal Quoted!


Big News For SBA 504 Loans!

The SBA 504 loan program reached a couple of milestones this month. First, the 25-year loan program (which you can read about in our by-lined article here) reached $1 Billion in lending, just under a year since the program’s first funding in July 2018. This figure represents 1,289 fixed-rate 504 loans to U.S. small businesses.

The 25-year maturity’s success is attributable to an outstanding interest rate, which is fixed for 25 years. Over the past twelve months, the average effective rate for the 25-year product was below 5%.

The second big news is the 20-year SBA 504 loan funding at a historically low of 3.98%. This is the lowest it’s been in the program’s 33-year history, and below the December 2012 record of 4.01%.. At 152 basis points under the Bank Prime Rate, the June funding is the furthest below prime that 20-year rates have been since May 2007. (See chart above.)

Clearly, no time has ever been better for SBA 504 borrowers to lock in a fixed-rate commercial property loan. Beat the rush that will be triggered by the new low rates, and contact us today to get started. Liberty SBF can get the job done in 45 days or less.


SBA 504 Loan Rate Drops to Historic Low

This June, SBA 504 borrowers can secure financing at a 20-year fixed rate below 4 percent for the first time in the program’s 33-year history. The 20-year effective rate for June is 3.98 percent, below the December 2012 record of 4.01 percent.

At 152 basis points under the Bank Prime Rate, the June funding is the furthest below prime that 20-year rates have been since May 2007. Market observers are predicting that the Federal Reserve will make two ¼-point interest rate cuts this year, but even with cuts, the 504 effective rate may remain approximately one full point below prime. This is the first time a 20-year 504 effective rate calculation has been this low.

Clearly, no time has ever been better for SBA 504 borrowers to lock in a fixed-rate commercial property loan. Beat the rush that will be triggered by the new low rates, and contact us today to get started. Liberty SBF can get the job done in 45 days or less.


SBA 504 Milestone and the Senior Housing Changes…

New 25-Year Fixed Rate SBA 504 Loans Reach $1 Billion Milestone

Small businesses, banks, and investors warmly received the SBA’s 25-year loan program, launched in July 2018. In June, less than a year later, the total amount lent reached $1.04 billion, exceeding the $1 billion goal for the first year. The numbers represents 1,289 fixed-rate SBA 504 loans to U.S. small businesses.

Also: Read our article on what the 25-year term means to business owners.

Senior Housing Needed for Middle-Income Boomers

Medical Facility in Arizona

Senior housing today is unaffordable for middle-income retiree such as nurses, schoolteachers, firefighters and steel workers, and they will have too much income to qualify for Medicaid. Aging boomers also want more amenities and independence, and as-needed healthcare than earlier generations. Real estate investors, developers, owners and operators need to innovate fast. Some proposed solutions include tax incentives, repurposing existing real estate like former malls and big-box retail, designing for construction, operational efficiency and cost savings, and volunteer caregivers.

Rising Costs of Mandated Hotel PIPs

Nearly every hotel deal comes with a mandated, formal property improvement plan (PIP) that addresses every aspect of the hotel from mechanical systems and plumbing to lighting, landscaping, and parking. PIPs are increasingly costly, as branded hotels have become more aggressive in their PIP requirements. The PIP can be negotiable, especially for sellers and buyers who have existing relationships with the brand. Negotiating PIPs early on can directly increase profits for sellers and lower the costs for buyers.

US Retailers Strive to Differentiate Offline Channels

A recent study by Avison Young describes the challenges online retailers present to offline retail distributors in the US. As Amazon creates a shopping environment unrestricted by time, place, and product, some department store chains have improved offline sales by stepping up customer-friendly services. For example, Nordstrom is expanding its service-hub Nordstrom Local concept that combines several of its most popular or highly demanded services under one roof to serve customers in their own local markets.

How Can We Help You?

Liberty SBF offers quick closings for SBA 504 and conventional loans. We’d love to help you.

Let’s Talk. 


Rate Cut Expected as POTUS Pressures Fed

President Trump continues to criticize the Federal Reserve sharply for past interest rate hikes. He is demanding rate cuts in 2019. Stock market investors, rattled by threats to impose tariffs on Mexican goods, want rate cuts to bolster the equity market. Most (95 percent) Wall Street observers anticipate that the Fed will announce a quarter-point cut following its June or July meetings, according to BMO Capital Markets.

The Fed’s strategy conference last week in Chicago began to prepare the public for a round of quantitative easing in an effort to short-circuit opposition to the measure. Citing lessons learned following the 2008 crash, Fed Chairman Jerome Powell said the Fed must take measures now and purchase assets to counteract risks of a recession. Trump’s trade wars put the Fed in a tough spot as it tries to support high employment and low inflation (nytimes.com).

Rate cut or not, today’s low interest rates make this a good time to lock in a fixed rate commercial property loan. Liberty SBF can get the job done in 45 days or less.

Contact us today to get started.


Liberty SBF Donates Office Chairs to Habitat for Humanity

When Liberty SBF decided to replace office chairs in its Philadelphia office, they thought that the old furniture shouldn’t go to waste.

“The old ones were still in good condition and we didn’t want to throw them away to sit in a landfill,” said Joe Breen, an intern in the company’s credit department.

Liberty SBF took the time to reach out to a few donation centers and finally settled on Habitat for Humanity Philadelphia.

“Habitat for Humanity Philadelphia was enthusiastic about taking the 15 chairs we donated,” said Liberty SBF Recruiting Director Meghan Schmidt.

The organization told Liberty SBF that after they build a house, they can furnish them with gently-used furniture, or the sell them to raise money for their building costs.

To find out more about Habitat for Humanity Philadelphia, click here.


Medical Office in Phoenix, SBA 504 Loan Benefits

The Latest Commercial Real Estate News From Liberty SBF

10 Reasons Applying For an SBA 504 Loan is Worth It

AZBigmedia.com published a summary of the top 10 reasons to apply for an SBA 504 loan. A low down payment topped the list, allowing business owners to purchase a property they otherwise couldn’t afford. A 30-40 percent down payment isn’t attainable for most small business owners but the SBA 504 loan program finances up to 90 percent of the acquisition plus some soft costs. Long term, fixed interest rates are other reasons to go SBA 504. The full list provides a quick education on 504 financing.

Phoenix Medical Office Vacancy Falls 33%

Doctors talking in hospital hallway

Demand in the form of an increased population has helped the medical office market in Phoenix. A new report from JLL shows that vacancy rates have fallen by 33 percent in the past five years. But, it’s not just a population boom that is driving growth in this corner of America. Over the years, Phoenix has attracted some heavy hitters in the medical provider sector including the Mayo Clinic, Banner Health and Dignity Health, the largest hospital system in the US.

The Drumbeat to Cut Rates Gets Louder

As the trade wars continue to escalate, Federal Reserve Chairman Jerome Powell reassured the financial markets, saying the Fed will “act as appropriate to sustain” the current economic expansion. Is a rate cut appropriate to the times? Anxious about the trade war, Wall Street is expecting that the Fed will cut its benchmark rate twice before the end of the year.

Liberty Closes Over $40MM in Industrial Property Loans

Liberty SBF clients have been participating in the new economy with over $40MM in industrial property loans closed across the county. See all of Liberty SBF’s recently closed loans.

How Can We Help You?

Liberty SBF offers quick closings for SBA 504 and conventional loans. We’d love to help you.

Let’s Talk. 


Rate Cut Drumbeat Gets Louder

As the trade wars continue to escalate with President Trump’s new threats to impose high tariffs on Mexico, Chairman Jerome Powell reassured the financial markets on Tuesday, saying the Fed will “act as appropriate to sustain” the current economic expansion. Is a rate cut appropriate to the times? Anxious about the trade war, Wall Street is expecting that the Fed will cut its benchmark rate twice before the end of the year (cnbc.com). 

Not all observers think the Fed should act to cut interest rates. Even with inflation low and looming trade threats, Kansas City Federal Reserve President Esther George said there’s no need for a rate cut. President Trump, however, has been leaning on the Fed to cut interest rates in the context of the trade war with China, saying a rate cut would ensure a US victory: “Game over, we win!” 

The rate game is not over though. We will keep watching as things unfold but for now, one thing is certain: interest rates today remain low. It’s a good time to lock in a fixed rate commercial property loan. Liberty SBF can get the job done in 45 days or less.

Contact us today to get started.


Flex Office Trend and the Small Business Persons of the Year…

Flex Office Is Growing in Urban Markets

Front exterior of an industrial warehouse building in Queensland Australia. Click to see more…

According to JLL, flex office space is growing by an average of 33 percent each year, accounting for almost two-thirds of US occupancy gains. No markets are over-saturated, and there are plenty of opportunities for this type of asset in many US metropolitan areas. The top ten growth markets are New York City, San Francisco, Silicon Valley, Austin, Boston, Northern Virginia, Washington DC, Seattle, Denver, and Los Angeles’ Westside.

Arizonans Named SBA Small Business Persons of the Year

Jennifer and Jeff Herbert, founders of Superstition Meadery in Prescott, Arizona, were named 2019 SBA Small Business Persons of the Year. They produce mead (fermented honey with fruit, herbs, and spices), the world’s oldest known alcoholic beverage. The Herberts grew their $5.5 million, 140-employee, two-locations business with SBA financial and counseling support. An SBA 504 loan covered the costs of constructing its new distribution and franchise support center in 2017.

What You Need to Know About SBA 504

TMC Financial’s CEO Barbara Morrison spoke about SBA 504 lending to cpexecutive.com. She was asked about the three main things borrowers don’t usually know about 504 lending. One thing she said was that many business owners are unaware of the program and its 10% down payment, which she called a “game-changer” for many owners. Other business owners weren’t aware they qualify as “small” business owner. “The SBA’s definition of ‘small’ is substantially larger than what most people assume. The truth is, most for-profit businesses qualify,” she said. Morrison also said that there is a misconception about how long it takes to get SBA financing.

Liberty SBF Adds New Originator to Fast-Growing National Team

Liberty SBF is excited to announce that Carlos Vasquez, MBA has been appointed VP, Originations, a new originator on our fast-growing national team of top-ranked commercial real estate professionals. Based in Austin, Mr. Vasquez will further increase our capacity to provide high leverage fixed-rate SBA and conventional loans in Texas.

How Can We Help You?

Liberty SBF offers quick closings for SBA 504 and conventional loans. We’d love to help you.

Let’s Talk. 


Fed Keeps Interest Rates Steady Despite Political Pressures

With U.S. inflation at 1.6 percent for Q1 2019, the Federal Reserve continues to hold off on any interest rate changes following last week’s meeting of the Fed’s Open Market Committee. With both President Trump and Vice President Pence urging the Fed to cut interest rates, the central bank is working to convince observers that its goal is to see price and wage increases without the expectation of rate cuts. Fed Chairman Jerome Powell said the Fed, as a nonpolitical institution, would not be swayed by pressure from the White House.

Powell said he expects price gains to emerge eventually. U.S. employers added 263,000 jobs in April, resulting in a 3.6 percent unemployment rate. If the labor market continues to tighten, employers may raise wages to attract talent, while consumer demand may allow companies to raise prices. Both are slow to appear at this time.

Economists agree that today’s job boom and low inflation seem unlikely, as low unemployment tends to slow the rate of job creation. For now, however, it appears that the Q4 2018 fears of an economic slowdown were unfounded.

Now is the best time to lock in a fixed rate loan while interest rates are still at historic lows. We can get the job done in 45 days or less.

Contact us today to get started.


Rate Hike or Rate Hype?

Man in suit with graph showing loan interest rates

Will we see an interest rate cut in the near future? The White House is calling on the Federal Reserve to cut interest rates immediately. Rates today are just below 2.5 percent, and President Trump and his economic adviser Larry Kudlow want to see rates at about 2 percent. Investors seem to agree, as Wall Street is already pricing in a rate cut for later this year. Most independent observers in the US are forecasting slowing economic growth.

At the same time, reports CNBC, Fed Chairman Jerome Powell’s dovish March 20 announcement of no change in interest rates set off a week of upheaval in global bond markets, with yields spiraling lower. Expectations of lower interest rates are fueling concerns about a weaker global economy, intensified by fears of what may happen in Europe and uncertainty about a US-China trade deal.

But, leaders in the commercial real estate industry have already said they are anticipating a rise in interest rates, according to Seyfarth Shaw’s 2019 Real Estate Market Sentiment Survey. Amid concerns that the current growth cycle will come to an end, ninety-one percent of respondents said they expect at least one interest rate hike this year, with 6 percent projecting as many as three. The real estate industry sees Fed policy and political and stock market volatility as indications that higher interest rates are on their way.

The one thing we know for sure is that interest rates won’t stay low forever. With a variable rate mortgage tied to the prime rate, monthly payments will rise as rates go up. Business owners with commercial property debt tied to an adjustable rate should protect themselves and their clients by refinancing with a fixed-interest SBA 504 loan. To refinance a government loan (ineligible for the SBA 504), a fixed-rate Liberty SBF conventional loan will do the trick.

Now is the best time to lock in a fixed rate loan while interest rates are still at historic lows. We can get the job done in 45 days or less. Contact us today to get started.


Hotel Financing With the SBA 504 Loan Program

The US hotel industry saw another record year in 2018, reaching absolute values that were the highest ever benchmarked. A 10th consecutive year of growth is predicted for 2019, according to CBRE Hotels Americas Research.

Borrowers who seek to acquire or refinance hotel properties are finding that some lenders today are cautious on hotel deals, as many see the sector at a peak.

There are still good deals out there. As experienced lenders, we are convinced that the best, most cost-effective solution is to finance your hotel is with an SBA 504 loan. In this article, we will walk you through today’s peak hotel market, as well as recent changes that affect SBA 504 loans.

The thriving hotel market

The demand for hotel accommodations continues its nine-year rise in line with the continuing strength of the US economy, with hotel occupancy seeing a 0.5 percent year-over-year increase to 66.2 percent in 2018, the fifth straight record level for the industry. The average daily rate (ADR) rose 2.4 percent to $129.83, and revenue per available room (RevPAR) increased 2.9 percent to $85.96. Group and corporate travel stays will be a consistent source of demand growth for hotel rooms in the U.S., according to STR. Additionally, weekday demand is very strong, indicating that corporate/ business guests are traveling more frequently.

CBRE even predicts that overall hotel returns over the next three years will be the highest of any commercial real-estate sector. According to CBRE’s R. Mark Woodworth, “The magnitude of profit growth may not be spectacular, but the probability for revenue growth is solid, and operating margins remain well above historical levels.” Growth will be slower for sure. STR & Tourism Economics forecasts demand growth year¬-over-¬year at 1.9 percent, compared to prior projections of 2 percent.

What does this mean for loan seekers?

Hotels have emerged as one of the commercial real estate sectors where owners can still make the returns compute. Bank financing on commercial real estate isn’t as readily available today as it was over the past few years, however, and owners may face challenges in finding affordable financing. Timing can make the difference between winning and losing for owners seeking to lock in a relatively low long-term interest rate on an asset. We believe the proven solution is to borrow from an experienced hotel lender with expertise in SBA 504 loans. Capital is there for reaching short- and long-term financing goals if you know where to find it.

SBA 504 loans and hotels

Hotel owners will find the SBA 504 loan has advantages that no other can equal. For facilities that are older than two years, borrowers can take advantage of all the many benefits that come with the SBA 504 program: 85 percent LTV (loan-to-value ratio) financing, a low fixed rate, and up to 25-year terms. The SBA guarantees a portion of the loan assuming the risk of default, allowing for a much higher LTV than any conventional commercial property mortgage alone. SBA 504 loans can be used solely to acquire existing hotels, acquire and renovate a hotel, and refinance an existing loan.

The SBA classifies some properties as “special purpose” properties. It defines a special purpose property as “a property that is appropriate for one use or limited use: a building that cannot be converted to another use without a large capital investment,” and requires a 15 percent down payment on 504 loans.

Also, borrowers cannot use the SBA 504 program to refinance an existing SBA or other government loan.

Close-up of an SBA 504 loan

Let’s demystify the nature of an SBA 504 loan. Imagine a borrower is seeking SBA 504 financing for acquiring a Best Western hotel for $4.2 million, including the PIP. Where will the funds come from? How much money does the borrower need to come up with out-of-pocket for the down payment?

We can calculate the financing structure of an SBA 504 loan simply as: 50 percent + 35 percent + 15 percent = 100 percent. That formula breaks down as follows:

• 50 percent: The first 50 percent takes the form of a conventional loan from a financial institution like a bank or specialty SBA lender. The first-lien loan is usually a fixed-rate loan amortized over 25 to 30 years. In our example, this means that the first-lien lender will commit $2.1 million toward the total financing of the deal.

• 35 percent: The next 35 percent of financing is a 20-year second-lien fixed-rate loan from an organization known as a Certified Development Company (CDC). A CDC is an SBA-regulated, nonprofit organization with a mission to promote community economic development through the SBA 504 loan program. Each of the more than 260 CDCs nationwide covers a specific geographic area of operations, usually the state in which the CDC is incorporated. The SBA assumes the risk on the CDC’s second-lien loan through its guarantee. If the borrower defaults, the SBA will pay off the loan. Our hypothetical hotel buyer will secure a second-lien loan in the amount of $1.47 million from the CDC, guaranteed by the SBA.

• 15 percent: The final 15 percent is the down payment from the borrower. Most conventional loans require a 25 percent minimum down payment, so the borrower realizes significant cost savings with an SBA 504 loan. For our imagined borrower, the down payment will be $630,000.

• When a borrower is acquiring a branded hotel, the franchise typically requires a property improvement plan (PIP) that will bring a hotel into compliance with the brand’s latest standards, from design to energy efficiency. The SBA 504 loan will finance up to 85 percent of the acquisition cost plus PIP.

Recent changes in SBA 504 regulations

The past few years have seen the SBA increase its scrutiny of borrowers’ qualifications for the 504 program. While it used to overlook borrowers who were minority (less that 20 percent) stake partners, the SBA is now looking closely at them and the type of hotel ownership they hold. Formerly, when minority owners had too much SBA debt to qualify, they could hold a five percent stake, while the majority owners were said to be running the business. Today, they are no longer tucked away from SBA scrutiny—every borrower on a deal must have no more than $5 million in total outstanding SBA debt. A good SBA 504 lender with hotel experience will understand this requirement, and help you structure your deal to help avert any future problems with your partner borrowers down the road.

A fairly new SBA requirement is for borrowers to submit a feasibility study to ensure that market conditions support the potential future success of the hotel investment. The feasibility study is a report by a qualified third party that examines the local market, demographics, and other factors that are expected to affect the hotel property’s performance, such as an already overbuilt market.

After reviewing an SBA 504 loan package, an experienced SBA lender will ask the right questions, anticipate problems, and help the borrower overcome any potential roadblocks. This is why it’s so important to find the right lender. The experts at Liberty SBF have an extensive network of finance industry contacts. We specialize in helping guide both borrower and CDC though the loan process efficiently to ensure their successful SBA 504 loan.

Smart financing

The hospitality industry may be at a peak, as some predict, but Liberty SBF also believes there are still good assets to be found and when a borrower has identified one we are here to help them secure the deal with a low, fixed rate.

Contact Liberty SBF today. Email info@i.libertysbf.com or call (213) 297-5747.

You can also connect with Liberty SBF on LinkedIn


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