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Hoteliers – Lending Headaches?

Changes in SBA Lending Deserve Your Attention

By Dr. Diana Driscoll, August 2, 2010

Without a doubt, it has been a tough couple of years for virtually all hoteliers.  Not only has RevPAR dropped precipitously, but even more importantly, NOI’s have decreased in over 91% of all U.S. hotels in 2009 (Trends in the Hospitality Industry Report, 2010). 

With the suffering of the entire industry, however, comes attention, and Washington is taking notice.  Some big changes are taking place in SBA lending and as a hotelier, you may find that the SBA is now a viable alternative for your business. 

Once considered a paperwork nightmare for entrepreneurs and thus used only as a last resort, SBA lending is currently easier and more expansive than ever before.  The program has increased its maximum loan amounts and guarantees, simplified its paperwork, expanded its lending for “green” building and retrofits and decreased or eliminated its fees. 

Even more enticing is the new SBA Bill – HR5297 (the “Jobs 3 Bill”) – which has now passed the House and is ready for Senate consideration. With HR5297, you may be able to refinance your current loan, receive a larger loan than ever before and be a candidate for a loan if you are a larger company.  Is this what hoteliers, indeed all small businesses need to pull out of our economic woes?  Possibly.  Let’s take a closer look. 

Were you aware that some SBA loans can be used for working capital or refinancing existing debt?  Others can be used for “any legitimate business purpose”, SBA 504 loans are available with as little as 10% down and are currently at a 5.21% fixed rate for 20 years (with no balloon) and there is now a “Green Retrofit Refinance” option?  Let’s break these down and see if your hotel(s) qualify for these generous loans. 

Ruling out the SBA loans that do not pertain to hospitality, you can consider four basic types of loans (even if it is a bit simplistic in the interest of the reader’s sanity): 

  • SBA 7(a) loans
  • SBA 504 loans
  • SBA “Green” Loans
  • ARC loans
SBA 7(a) loans

SBA 7(a) loans are often considered the “darling” of loans for most hospitality needs.  According the Small Business Administration, “the 7(a) loan can be used for “any legitimate business purpose”.  This could include:

  • The refinance of commercial real estate
  • The refinance of business debt
  • Working capital
  • Tenant improvements
  • Equipment financing
  • Inventory
  • Feeling brave?  A recession is a terrible thing to waste.  SBA 7(a) loans can also be used to finance new building construction, purchase of an existing business and real estate.
Rates for 7(a) loans depend upon the lenders involved, but are capped at prime plus 2.75%.  They are currently available for up to $2M, although the maximum loan limit may soon be raised to $3M or $5M (more on that later). 

A huge benefit of 7(a) loans is that they are generally safe and profitable for banks and lenders because lenders can sell the loans for a profit on the secondary market and they currently offer a 90% “guarantee” from the SBA.  This combination of profit potential and safety makes the loans more palatable for lenders – something skittish bankers are seeking.

SBA 504 Loans

A 504 loan provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization.  It can make the difference between a project penciling out – or not.  Some advantages of the 504 include:

  • 10% equity requirement
  • Low rates, fixed for 20 years (rates change monthly and are currently at 5.21%)
  • No balloon 
  • Currently most or all loan fees are waived
  • The 504 loan can be combined with the new SBA “Green Loans” for an even bigger bang for your buck.
It is important to understand that SBA 504 loans consist of three pieces:
  • 10% equity piece
  • 50% first mortgage piece
  • 40% second mortgage guaranteed by the SBA 
The combination of the two mortgage pieces, both fully amortized long-term, and the permanently fixed component of the second mortgage, make this package palatable for many lenders.  If the Jobs 3 Bill passes the Senate, the benefits of this loan increase dramatically (discussed below).  Additionally, the 504 loan can be combined with the “SBA Green Loan”, potentially increasing the amount of your loan dramatically.  So by all means, if you are considering the use of “sustainable design” into your building project or expansion, or you are interested in a “green retrofit”, be sure to look at the benefits of 504 loans for these projects.

SBA “Green Loans”

If you are considering building, purchasing, remodeling, refinancing or completing your hotel PIP’s, adding sustainability into your efforts may qualify you for significantly larger SBA loan amounts.

A business that implements, produces or manufactures any of the following types of renewable energy resulting in a 10% reduction in energy consumption can qualify for an SBA Green Loan. Examples include, but are not limited to the following:

  • Solar Power
  • Wind Power
  • Geothermal
  • LEED certified design, systems, and construction
If you are a minority, veteran or woman based enterprise, you will likely qualify for larger SBA loan amounts, including the Green Loans.  Currently, for example, sustainable construction can increase your SBA loan amount by $2 million.  Technically, it is possible to borrow over $20 million with SBA financing, but in reality, lenders are currently most comfortable with $10 million and below.  Although the SBA is providing the guarantee, the loan actually comes from a commercial lender, not the government.  If the lender is not willing to provide the loan, even if they may be able to get an SBA guaranty, the Agency can not force the lender to change their mind.  What could change this hesitancy and result in an immediate surge of bank interest in SBA lending?  The Jobs 3 Bill! 

The Jobs 3 Bill (HR 5297)

This bill, which has been passed by the House and is currently being considered by the Senate, would allow hoteliers with balloon notes to refinance using the SBA 504 program.  Additionally, the maximum loan amount for an SBA 504 loan would increase substantially, the 90% guaranty for the SBA 7(a) loans would be extended over time, and larger businesses  (up to a tangible net worth of $15 million instead of the current $8.5 million) could qualify for the loans.

As stated by John King in his blog, 

“This is the bill that stands to have the most immediate and long term impact on owners of small and mid-sized businesses because it is a potential “game-changer”.
“ARC Loans” (America’s Recovery Capital)

ARC loans are one of the best kept secrets in the lending industry!  The loan is designed to give viable small businesses suffering immediate financial hardship, a leg up to tie them over until profitability returns.

These loans (up to $35,000 per entity) can be used to pay down existing principal and interest payment on existing (and qualifying loans).  Amazingly, there is a 12 month deferral plan (no payments need to be made for a year), and the loan can be paid back over five years at zero percent interest.  ARC loans are 100% guaranteed by the SBA, and are generally provided with no fees to the borrower.  The SBA will pay the lender a rate of prime plus 2% on behalf of the borrower.

ARC loans are currently available until the end of September, 2010, but may be extended at that point. 

Complicated?  Once underway, most people find the application procedures no more difficult than a conventional loan.  Allow a qualified SBA expert to take care of you through this process.  Because their fee is generally paid by the lending institution, you need not fear wasting money on application fees or retainers.  To learn more, go to and see if the new SBA loans deserve your attention. 

© 2010 Dr. Diana Driscoll, Ridgeline Hospitality, LLC

About Dr. Diana Driscoll and Ridgeline Hospitality, LLC

Dr. Diana Driscoll, LEED AP B, D + C (the LEED AP specialty for Building, Design and Construction), has found her passion in “green” hotel development, and consulting with hoteliers concerning sustainability, social media and “recession management”. As CEO of Ridgeline Hospitality, LLC, and the founder of Hotel Rescue™, she heads up a team of experts to offer immediate assistance to hoteliers in this tough economic climate.  Her message?  “Go Green Gradually!”

Philanthropy plays a large role in her work, as does public speaking and writing, where you may find her addressing topics from social media to medical research and LEED developments. 


Diana Driscoll, LEED AP, B, D & C
twitter: @dianadriscoll @HotelRescue
skype: diana.driscoll1
1834 Keller Parkway, Suite #400
Keller, TX 76248

Also See: Hoteliers – Use Your Marketing Dollars Wisely; The Importance of Visual Imagery / Diana Driscoll / July 2010
Greening Your Hotel Meetings and Conferences /Diana Driscoll / June 2010

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