Hospitality is one of the first industries to tank when the economy slows. It also leads us out of recession as things improve. And just as during most recessions, hotel and motel vacancies soared during the Great Recession. Additionally, revenues per available room (RevPAR) plunged.
The good news is that the hospitality industry is improving and lenders are slowly coming back into the market as vacancy drops and RevPAR steadily increases. According to industry reports, RevPAR has increased over eight percent last year and continues to improve.
Conventional financing is increasing slowly and requires substantial down payments ― 25 to 30 percent. By comparison, U.S. Small Business Administration-backed loans are increasing at a quicker pace and up to 90 percent financing is available.
Increasingly, the equity is coming from wealthy foreigners seeking permanent U.S. resident status under the EB-5 immigration program. Asians and Europeans, for example, are coming to America because of the political and economic conditions in their country. They like the stability of the dollar and also want their children educated in the U.S.
The program requires a minimum investment of $1 million into the U.S. economy. The investment must also create 10 full-time jobs within two years. Only $500,000 is required if the jobs are created in a rural or high-unemployment area.
Most often, SBA financing is sought to finance small hotels and motels when the project costs are below $15 million. Franchised hotel properties received 47.3% of all hotel SBA loans, according to the IFA/BoeFly Franchise Lending Index. It is published by the International Franchise Association and BoeFly, an internet-based marketplace for borrowers, franchisors investors, and lenders. Qualified loan applicants receive multiple offers from among BoeFly’s 2,200 lenders.
“The credit markets are improving in some sectors more than others,” says David Nayor, BoeFly’s co-president. “Lenders are seeing market conditions improving and are competing to get quality deals.” Regarding the hospitality industry, he says, lenders “like franchise brands with a history of success.” Additionally, existing, well-located, non-franchised hotels in strategic urban and resort locations, may also be of interest to BoeFly’s lenders. Borrowers with strong balance sheets and substantial equity are getting deals done.
Nayor says, “the lenders are still looking for solid balance sheets, seasoned borrowers with industry successes under their belts and profitable properties.” In other words, lenders want to see a track record of cash flow to be assured of the property’s ability to pay the debt service.
SBA’s 7(a) and 504 programs are both suitable for financing hospitality properties. 7(a) loans are limited to $5 million. 504 financing consists of two loans: a conventional first mortgage made by a bank, private lender, or even an individual lender. It is usually 50 percent of the project cost but may be larger if the lender is willing to take more risk, and SBA’s portion is a subordinated debenture ― a junior lien guaranteed by the agency. The debenture is limited to $5 million for hotels.
Florida First Capital Finance Corporation (FFCFC), for example, recently refinanced the Ocala Holiday Inn and announced a “$13 million deal.” The $13 million represents total project cost or value, whichever is lower.
So I asked John Hanrahan, FFCFC’s vice president how much of the total project was funded by the first loan and second loan together. “The total loan amount was $11,609,000,” he said. That represents 89.3 percent funding. (By comparison, a convention loan would likely be $9,750,000, representing 75 percent.)
“The hotel has high visibility from I-75 and the owners have more than a decade’s worth of experience in the lodging operations business,” Hanrahan said. “This is a strong enterprise with a solid cash flow and just the right candidate for the temporary 504 refinance program.”
Unlike the “standard” 504 program, the temporary program does not require job creation. Standard 504 requires creation, or retention, of one job for every $65,000 of SBA’s debenture.
SBA financing is suitable for refinancing existing real estate and business loans. A start-up with a solid business plan may also qualify. 7(a) can provide working capital and equipment loans. Business acquisition loans may qualify for buying a successful target company.
Jerry Chautin is a former entrepreneur, commercial mortgage banker and business lender. He writes and blogs about business and real estate for several publications and is SBA’s 2006 national “Journalist of the Year.” Jerry is a volunteer business mentor with SCORE, “Mentors to America’s Small Business,” offering free business advice. Post your comments and ask questions on this Blog or send Jerry an e-mail.