President Obama’s recently released fiscal year 2012 budget made quite a stir in the small business community with reports from sources such as Bloomberg reporting that the Small Business Administration will see a 45% decrease in funding. The National Association of Government Guaranteed Lenders (NAGGL) has countered that these numbers are misleading because they use the dollars in the Jobs Act as a baseline. NAGGL states the FY2012 budget actually shows an increase in credit subsidies.
Regardless of a budget that has yet to be approved, if your e-mail inbox is anything like mine, you receive messages on an almost daily basis from lenders highlighting the closing of SBA and USDA loans. The good news is that lenders are actively providing debt to small businesses in often under-served communities (although this may drop off if either the federal budget or an emergency spending measure is not approved). Some lenders are looking to double their volume in these loans during 2011. But, the hidden secret is not all of them are lending on hotels or the terms highlighted are not available to hospitality borrowers.
This isn’t false information; it is like most other advertising, an effort to use the strongest selling points to drive business. What it means for hotel owners and operators considering government-guaranteed loan products is that you need to have an understanding of what is available to the hotel sector. Because hotels still are not a preferred asset class, what you see in these marketing pieces may not be what you get.
What does it take to get a government-guaranteed loan on a hotel today, and what type of terms are generally being offered?
Deal and borrower characteristics
In general, many of the characteristics lenders want to see for conventional loans apply to both the SBA and USDA B&I programs:
- good flags;
- strong borrower financials;
- sound operators with good experience;
- ability to pledge additional cash or collateral;
- high traffic locations off major thoroughfares or interstates; and
- interior-corridor properties.
In addition, STR reports are required if they are available. Secondary considerations include the number of rooms and age of the hotel, preferably less than 25 years.
SBA programs
With the continued focus by lenders on refinance and acquisitions, the SBA 7(a) program is more active than the 504. However, more 504s might get done this year with the 28 February kick-off of the program to refinance owner-occupied commercial real estate with maturing mortgages or balloon payments. This temporary initiative, authorized under the Small Business Jobs Act, will be in effect until September 2012.
Although SBA guidelines state loan amounts can go up to US$5 million on 7(a) and US$5.5 million for 504s with loan-to-value ratios of 90%, in today’s environment that is often not the case for hotel properties. On hospitality, some lenders will only lend up to US$2 million and won’t consider LTV’s higher than 70%.
While there are always exceptions, the reality is the hotels getting financed today have the following characteristics:
- US$1.5 to US$3 million;
- 50% to 75% LTV, with 65%-70% as the sweet spot;
- at least 1.25X debt service, with most lenders preferring 1.4X or higher; and
- personal guarantees from all sponsors.
Borrowers typically receive floating rates between 5.75% and 7%, 20- to 25-year terms and up to 30-year amortization. Fixed rates are available on a very limited basis and are usually more than 7%.
Some lenders are willing to work with first-time buyers, but more equity is required. 7(a) loans for the acquisition of non-performing assets require 25%-30% equity and need qualified borrowers with experience. The refinance of an under-performing property is harder to close since the SBA may not approve a loan for a hotel that does not have positive cash flow for a minimum of two of the last three years. Maturing loans and balloons automatically qualify for SBA funds but the properties need to have positive cash flow and DSCR above 1.1X.
USDA business and industry (B&I) program
For owners and operators in tertiary markets, the B&I program offers the ability to access the credit markets for mortgage refinance and acquisitions, as well as FF&E financing. Construction financing is covered under USDA guidelines, but only in very limited situations are banks considering ground-up projects. Loans go up to US$10 million (at the Administrator’s discretion, exceptions can be made for higher amounts).
From a lender’s perspective, hotel projects applying for USDA funds must meet the following criteria:
- loan amounts to US$10 million, with many within the US$2- to US$5-million range;
- up to 70% LTV, with lower leveraged (60-65%) preferred;
- tangible balance sheet equity, which means cash, paid-in equity investments and retained earnings based on the type of loan: 10% on the refinance of existing properties, 15% on acquisitions and 20-25% on new development; and
- personal guarantees by all sponsors.
General terms include floating rates between 5.5% and 7.25%, with most at 7%, 25- to 30-year maturity, 30-year amortization and no cash out. On a refinance, more than half of the loan proceeds must be used to create or retain jobs.
It is important to note that properties must be in rural areas with a population of less than 50,000 to be considered eligible. While the B&I program offers access to capital to hotel owners in small markets, it is a lengthy process and typically takes up to six months to close.
The SBA 7(a) and USDA B&I programs continue to be one of the best, if not only, ways for smaller owner-operators and hoteliers in secondary and tertiary markets to access debt. This may change as approval of the federal budget drags out because of the lack of guaranteed funds, but for now, lenders are eager for deals. Not all hospitality projects will be considered. Borrowers need to be prepared for a longer process (a 30-day close is unrealistic) and tight underwriting with the strongest deals meeting the above criteria getting done. As the many e-mails suggest, more lenders are getting back into the mix, which is good news for the hotel industry in 2011.
Jane Larkin is managing director of Larkin Hospitality Finance, a national hotel investment-banking firm focused exclusively on meeting the debt and equity financing needs of hotel owners and developers. She can be reached at jlarkin@larkinhf.com or (469) 916-8518.
The opinions expressed in this column do not necessarily reflect the opinions of HotelNewsNow.com or its parent company, Smith Travel Research and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.
