On May 26th the Small Business Administration (SBA) made the 504 Refinance Program permanent. This is great news for hoteliers!
How it Works
The SBA 504 Refinance loan program offers up to 90% loan to value, based on the appraised value, of the real estate property. The effective interest rate on the SBA’s portion of the loan is low, as low as 4.22% in June, and is always fixed for 20 years. It is also possible to get cash out for operating expenses with up to 75% loan to value.
If refinancing real estate only with no cash out, a bank or private lender funds 50% of the Project costs, while an SBA-approved Certified Development Company (CDC) finances 40%, and the borrower puts in equity of 10%.
The ‘Wall of Maturities’
We are nearing ten years since hotel values peaked in 2006-2008. Many of these hotel loans are now coming due in what has been called a “Wall of Maturities”. Unfortunately, in some cases hotel values have not appreciated much or at all in that time. The high loan to value for the 504 Refinance program is good when hoteliers do not have a large amount of equity. The SBA 504 Refinance program is applicable for maturing conventional and smaller CMBS loans. Even though the 504 Refinance requires personal guarantees from the borrowers, unlike CMBS which is non-recourse, it may still be a good option for some hotels.
Lower Debt Service
The low interest rate, fixed for 20 years is another advantage of this program. Hoteliers who refinance with the SBA 504 from higher interest conventional loans can reduce the cost of their debt service, thereby increasing operating income. At a time when so many brands are announcing new brand standards, freeing up financial resources is a boon to hotel owners. Also, don’t forget that the Federal Reserve will likely raise interest rates a second time this year, with incremental increases surely to follow. This is a great option to secure a low interest rate while they are still historically low.
Talk to an Expert
With over 20 years of experience personally in arranging hotel financing, I know every situation is different. There are restrictions to eligibility and use of funds for the 504 Refinance. If you have a coming loan maturity or are considering refinancing, talk to an experienced mortgage broker to see if the 504 Refinance would work for you. I can’t recommend anyone more highly than Lynda Drehmer of MBA Capital Funding, sister company to MBA Hotel Brokers. Lynda has over 30 years of experience in banking and in depth financing knowledge specific to the hotel industry.
Learn more here or contact Lynda@mbacapitalfunding.com. Or email me with your comments or questions on your hotel financing situations.
Till’ next time,
– Charlie Fritsch