What hotels need to know about SBA opportunities

Financing is still available for hotel projects—for those who know where to look for it. The U.S. government, through the Small Business Administration and the Department of Agriculture, is an option for hoteliers who are in the market for a loan, and can offer some notable opportunities for hoteliers. 

A recent webinar, sponsored by Liberty SBF, discussed the value propositions of SBA programs and what sets them apart from other types of financing. Moderated by Elaine Simon, senior managing editor of Hotel Management, the panel was comprised of Alex Cohen, CEO and co-founder of Liberty SBF; and Greg Porter, SVP of capital markets, HREC Investment Advisors.

Banks, CMBS and Debt Financing

The state of the hotel finance market is improving, Porter said, noting that the hotel finance market in 2020 was “pretty much shuttered.” Borrowers, he said, were negotiating forbearances, and when they needed to find a new lender, they were paying a 9 percent rate—“if they could find that. So we're definitely in a better [position] today. Many lenders that were active in [2019] have returned to the market.” 

But it isn’t all smooth sailing. “Most bank lenders are looking to reduce their hotel exposure, not add to it,” Porter said. Some bank lenders will finance hotels—“conservatively”—for existing clients, he noted, and “a small handful” of bank lenders are writing conventional loans for new borrowers. But these are few and far between: “If you have a loan request in your market, you're going to local or regional banks,” Porter said. “If you go to 20 lenders, you might find one or two that are offering conventional financing.” Borrowers for full-recourse loans could expect rates in the 4 percent range with 50 percent to 65 percent leverage and 25-year amortization.  

Porter said commercial mortgage-backed securities lenders are “definitely back” for hotels that are “well flagged, well positioned and have strong trailing-12 cash flows. Rates for CMBS right now or in the “high fours to low fives,” he added. CMBS loans can be nonrecourse, and owners of newer hotels can secure a 30-year amortization. 

Debt funds, meanwhile, are available in three- to five-year terms with nonrecourse bridge financing. “That market is definitely improved,” Porter said. Over the last six months, lenders have been seeking “value-add deals,” acquisitions that could be profitable following a turnaround. Rates for these funds are typically in the 5 to 6 percent range. “Most of the debt funds have a minimum $15 million loan size, so it's for the larger deals,” Porter added, but acknowledged that some deals go for less. 

SBA Loans

Loans from the Small Business Administration may be attractive for recourse borrowers, Cohen said. Specifically, the SBA 504 program provides much higher leverage at what Cohen called “a very attractive cost from a rate standpoint” compared to conventional loans, CMBS and debt funds. 

“Most of our borrowers are trading … recourse for super-high leverage [and] low-cost financing as well as a loan that allows you to execute a business plan like a [property improvement plan] or some [capital expenditures] upon acquisition,” Cohen said. Notably, an SBA loan could be used for ground-up construction, an acquisition with CapEx or refinances, a distinction from the traditional model of bridge debt for acquisitions and perm debt for other purposes.

The SBA, Cohen added, is “fairly generous” in terms of what they consider to be eligible costs, including land purchase, hard costs and some of the borrower’s closing costs. “We're advancing on a total pie that is inclusive of all of the total costs that are going into the project, and the borrower is really only having to inject 15 percent equity against those total costs,” he said. “I think [this] makes the SBA 504 program, in particular, a very attractive program for hoteliers.”

Watch the full panel on demand here.