Few sectors of the economy were decimated by the COVID-19 pandemic like the travel industry. According to the U.S. Travel Association, there was a nearly $500 billion loss in spending due to the pandemic, and business travel specifically was down a whopping 69 percent in 2020 from 2019.
The good news is leisure travel is starting to pick back up, with short-distance destinations in particular on the rise. Those with cabin fever have found refuge by traveling within driving distance and staying within their comforts as various variants remain a threat.
That being said, the days of tens of thousands of people gathering at conventions haven’t returned just yet. Hotel owners, especially those in downtown business districts, can’t afford to wait for those prosperous days to make a comeback, and a recent Small Business Administration rule change allowing borrowers to refinance from one SBA program (7a) into another (504) for the first time ever, can help. Thanks to legislation introduced at the end of July, hotel borrowers now have the opportunity to refinance floating rate SBA 7a loans to preferable SBA 504 fixed-rate loans.
While this is a terrific option for almost any small business, it’s particularly relevant for select- and limited-service hotel owners. As a testament, AAHOA is a significant borrower of SBA programs and its nearly 20,000 members own 60 percent of the hotels in the United States.
Let’s take a closer look at how hotel owners can leverage this recent legislation to reduce their monthly payments and pull cash out for working capital.
Added Benefits to a 504 Loan
The 7a loan is SBA’s flagship offering. In 2020, there were roughly 42,000 7a loans created by the SBA worth a combined $22.55 billion. Typically, 7a loans are used for ground-up construction and cover all business expenses, which is why it’s among the most common government-backed loans sought by hoteliers. However, it typically takes a long time to get out of that loan because it takes a long time to build equity.
With this new legislation, hotel borrowers can refinance into the preferable 504 loan, typically used for commercial real estate financing. It has a fixed rate, requires as little as 10 percent down, has lower fees than a 7a loan, and perhaps most importantly, adds the ability to cash out up to 20 percent of the property value to use as working capital.
This is a huge opportunity for hoteliers looking to renovate, execute a property improvement plan or business plan, all while reducing monthly payments.
Additionally, the interim rule allows for refinancing up to 100 percent of a project’s debt, doubling the previous limit, and no longer requires borrowers to be current on all payments for 12 months before completing the SBA application.
Get in Now, Before Rates Start Rising
While the refinancing process for the housing market has been busy thanks to low rates, that will likely change soon. The Federal Reserve started tapering in December, which will likely cause interest rates to rise. This was expected at some point, and now there’s a loose timeline.
This is particularly important because 7a loans usually have variable interest rates between 5-6 percent. Refinancing to a 504 loan would allow for a lower, fixed rate. The SBA debenture rate for November 2021 is 2.88 percent fixed for 25 years.
While rates are expected to rise over the next several months, refinancing sooner rather than later could provide extra savings.
Leverage Lender Resources
If you already have a relationship with a bank, it will be able to ensure you are participating in the best loan program for you. Consulting a nonbank lender will also provide a thorough understanding of what options are available.
It’s best to work with lenders that are experienced with the 504 loan program and have an existing relationship with the SBA and certified development companies in your state. This will allow you to realize benefits of speed and certainty in executing your refinance.
This interim SBA rule doesn’t have an expiration date, but likely won’t be indefinite. Considering how difficult it is to project when the hospitality sector will fully recover amid the ongoing pandemic, and the likelihood of loan availability for hotels to fluctuate, this refinancing offer is simply too good to skip.
Alexander Cohen is CEO of Liberty SBF.