Public funding, incentives available for developers

National Report--Hotel developers who refuse to let the impeding debt market stall their growth may want to look to unconventional sources. Government-issued loans, tax breaks and other public funding options are more prevalent today as stimulus programs increase incentives. And many lenders are just now getting on board with the programs, which could translate to more options for borrowers.

“Some banks are more in tune with these programs than others,” said Kay Anderson, who is heading up a new hotel lending department for Mountain First Bank & Trust, based in Hendersonville, N.C., with approximately 14 branches. “Regional and community banks are pretty familiar with what’s out there. But some lenders have just recently applied.”

Government loan programs have always been available, but lenders are more willing to issue them today because recent incentives make them attractive. And if developers can’t borrow enough to get the deal done, public funding options such as Tax-Increment Financing and New Markets Tax Credits can help bridge the gap.  

“You really have to look at your entire package,” said James Carras, a finance consultant with Carras Community Investment Development. “You have to lay out what you are putting into the deal, look at what you can get from private financing and then look at what you can get from public or government programs.”

Carras and his firm help regional municipalities apply for tax credit funding they can distribute to developers. He also works with private developers looking to apply for tax credit programs, helping each understand what programs are available and walking them through the application process.

“If I think I can get a 60-percent loan-to-value, and I can put in 20 percent equity, I need to find the other 20 percent,” he said. “Maybe there is a local TIF agency and you can use that as gap filler, or a job credit that will give you more equity in the deal. And finally you look at New Markets Tax Credits or historic tax credits.”

Carras said the lending market is only going to get worse as commercial-backed mortgage securities come due during the next year, but that government programs will be there to pick up the slack by default. However, he said, developers can’t rely on government incentives to build a hotel that would not qualify for a traditional loan. He suggests penciling out the deal first as if there wasn’t any public assistance available.

Where to start
So you want to build a hotel, you’ve heard there might be government assistance, but you don’t know where to start? Don’t feel under-informed; an experienced lender should help wade through what programs are available. More important than knowing your financing options is choosing the right lender.

“How to interview a lender and how to save time by asking the right questions is important,” Anderson said. “You can waste time by going to a local bank that wants to keep your deposit business [but doesn’t qualify or isn’t educated on the incentive programs].”

Anderson and Carras said preparing the right documents is vital. Before visiting a lender, developers should create a package detailing their company and plans.

“Character does count,” Carras said. “Who are you? Why are you capable of doing this? Who’s on your team—architect, developer and consultant? ”

Carras also said developers must show a strong need for the project in the market.

“If you have a dream and a vision, that’s all you have,” he said. “You must have a plan that’s believable. Before every check is written, they’re going to need a sense you know what you’re doing. A company that’s done this before [will] have a leg up. If you’re just starting out, finding someone to team up with is essential.”

Anderson said putting together a business plan doesn’t require a third party, but a complete project description and a detailed budget, as well as projected construction costs and revenue, are imperative. Three years’ tax returns and a credit report will help the lender learn more about the borrower. Finally, Carras and Anderson both recommended sending the packet to five lenders simultaneously to increase the chances of assistance.

Available options
Although lenders will determine which public financing options apply on a case-by-case basis, it is important to get a handle on what criteria need to be met.

Concerning government-backed loans, Anderson listed three options: two Small-Business Association loans and one U.S. Agriculture Department program. She is expecting incentive changes to the SBA 504 program in the near future that will make it attractive to lenders because a guarantee from the Treaesury Department will allow them to sell the loan in the secondary market. Besides 504, the SBA 7A program is incentive-laden but limited to $2 million. Finally, the USDA Business and Industry loan is guaranteed at 80 percent and has a $10 million limit.
“The USDA B&I is more difficult to understand from state to state because of its requirements, but from a lender’s point of view, it’s an excellent program,” Anderson said. “It’s a guaranteed program and the secondary market is very strong.”

After a loan is secured, Carras suggested checking to see if any Tax-Increment Financing options exist locally. TIF is a public financing method using future gains in taxes to finance current improvements. Finally, he said, New Markets Tax Credits or historic tax credits can help bridge the gap between loan maximums and total project costs. The stimulus bill increased New Markets Tax Credits $1.5 billion annually—from $3.5 billion in 2007 to $5 billion in both 2008 and 2009.

In the end, Anderson said to act quickly as many of these stimulus programs will expire at the end of 2009 unless additional funds are appropriated.

“The stimulus bill greatly benefited borrowers but did not benefit the banks or cause a lender to act,” she said. “Some other incentives, such as the elimination of fees and 90-percent guarantees, have been rolled out to do that.”