How Refinancing SBA Loans Can Open New Doors for Hotel Owners

Originally published on Hotel Online

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.


How a Refinancing Option Supports New Construction

Originally published on Construction Executive

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.

Now is the time to strike with a refinance. It is expected that Federal Reserve policymakers will make two interest rate increases by 2023.

Added Benefits of a 504 Loan

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.