Why enhancing the SBA 504 Loan Program is critical for recovery

The Partnership for Small Business Relief is a coalition of hotel owners and operators, industry groups, banks, Small Business Administration lenders and others who are focused on the economic development and recovery of small business owners. Photo credit: Getty/vinnstock (Loan application and pen)

The hotel industry has faced an unprecedented disruption in the wake of the COVID-19 pandemic and resulting national shutdown. Hotels are one of the hardest hit industries, as Americans heeded the guidance of local officials to stay home and shelter-in-place. As of a few months ago, in April 2020, approximately 80 percent of hotel rooms were empty, as long-planned family vacations and business trips were all suddenly cancelled. With many states working through a slow recovery process, and some even having to scale back reopening plans in response to additional spikes of the virus, the hospitality industry will not be seeing a full recovery anytime soon.

The Coronavirus Aid, Relief, and Economic Security Act provided some short-term, immediate help to get hotel owners through the current hardship, but this is not enough to weather the full impact of this national emergency. Right now, long-term financing for industries that have been hardest hit by the pandemic is essentially frozen. Most banks and lenders are simply not able to take on the elevated risks associated with these properties. Those who do lend will most certainly offer unfavorable terms, with high, floating rates, strangling these already suffering business owners with debt they ultimately cannot service, causing them more harm than good.

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The Partnership for Small Business Relief is a coalition of hotel owners and operators, industry groups like the Asian American Hotel Owners Association, banks, Small Business Administration lenders and many others who are focused on the economic development and recovery of small business owners. We believe that the SBA 504 Loan Program can be an essential lifeline for hotel owners and contribute greatly to their survival by allowing them to tap into the equity of their existing real estate holdings, at a low, fixed rate.

If Congress is willing to make a few small legislative tweaks to the SBA 504 Loan Program, hotels and other industries would have access to the capital they so desperately need, all at zero cost to taxpayers. As such, we are advocating for two specific provisions for Congress to include in the next economic recovery package.

1. Expand SBA 504 Refinance

Congress should take action by expanding the SBA 504 Refinance Program to allow greater flexibility for modifications of existing 504 loans. This increased flexibility will allow hotel owners to tap existing equity in their properties for immediate cash—giving them the liquidity they need to pay their employees, fund essential business operations and consolidate or pay down high-priced, short-term debt that they may have accrued during the pandemic.

2. Reinstate the First Mortgage Loan Pooling Program

Congress can stimulate much-needed liquidity into the commercial lending marketplace by reinstating the FMLP, which provides an 80 percent guarantee on SBA 504 first-lien mortgages and reduces the risk for SBA first-lien lenders. With the FMLP in place, lenders at community banks, regional banks and smaller nonbank lending shops can begin to deploy capital to the hotel industry through the SBA 504 Loan Program again. Additionally, the FMLP does not require hefty legislative work on the part of Congress or the SBA. Since the program was temporarily put in place during the 2008 recession, there is an existing playbook that Congress can resurrect. The Partnership for Small Business Relief recently presented an outline plan to reinstate the FMLP legislatively to key members of the Senate Small Business Committee.

Most importantly, neither of these proposals require any funding from U.S. taxpayers. They are turnkey programs that have a proven track record of success. As a matter of fact, during the last recession and in the 10 years of FMLP bond performance since the program began, it generated almost $15 million in positive P&L for the U.S. government, according to Government Loan Solutions, a company that specializes in government guaranteed loan data.

As Congress considers the next round of small business relief from COVID-19 challenges, it is critical that they consider these small enhancements to the SBA 504 Loan Program. Hotels owners need this support desperately if they are going to survive this pandemic and continue making an important contribution to their local economies.

Alex Cohen is CEO of Liberty SBF, a small business finance company, and the founder of the Partnership for Small Business Relief. Get more information about the partnership at www.enhance504.com.