Scientific Capita Group, Inc.- A National Hotel Finance Company

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H.R. 5297 - Update on Small Business for the Hoteliers

September 23, 2010 - 12:00 PM

The bill passes the house and is sent to President Obama for Signing

In a 242 to 182 vote this morning, the House passed the H.R. 5297 bill and the Congress sent the bill to President Obama for signing. The major benefits of the bill for us in the hotel industry are:

SBA limit increase to 5 million
As opposed to the previous limit of 2 million, now the SBA 7a can go up to 5 million. If in the current credit climate, we consider an equity of 25% for the acquisition or the refinance of a hotel, the total project cost may be 6.66 million. For a 504 project, considering the 5 million to be a 25% 2nd trust deed by the SBA behind the first, the limit increase allows a project of 20 million to be financed through this program where the first trust deed by a lender will be at 10 million, the 2nd by the SBA at 5 million, and the borrower equity injection at 5 million.

Extension of the 504 first trust deed pool guarantee program until mid-2012
This program previously set to expire on February 17, 2011 is now extended for additional 2 years from the date the first pool was assembled in August 2010. It is well known that the 504 program has been on the sidelines due to unavailability of credit for the first trust deed loans that are conventional non-guaranteed loans. The pool offers guarantee for the first trust deeds and will open the secondary market for these loans. Read more...

Refinance through 504 program
Although it is too premature to rely on this new SBA program prior to the full implementation details of the program provided by the SBA, this feature is to bring the 504 loans from obscurity to mainstream. With this change, a 504 loan can be used for complete refinance of a hotel loan specially applicable for those loans that are over 5 million in size or for the borrower who have used portion of the 5 million allocation, hence using the remaining SBA portion for a larger loan size structure.

Extension of the fee waiver/90% gurantee until 12/31/2010 (or until funds run out)
It is worth noticing that there has been a back log of applicants on the SBA queue awaiting this bill to pass, so the funds will be allocated to these borrowers in the queue and will continue to be allocated to applicants until the funds run out. As before, the hotels with pools have to be processed differntly for the ARRA funds. The SBA statement is as follows:

"A loan may be made under the Recovery Act to a small business applicant to acquire, construct or renovate a hotel that also has a swimming pool and/or golf course if the applicant certifies that alternate funding (which may come from the borrower’s equity) has been obtained to pay the costs allocable to the acquisition, construction or renovation of the swimming pool and/or golf course."

Lets examine the process for the following two cases:

CASE 1- Hotel acquistion of 2,000,000: In this case the lender will request the appraiser to estimate the value/cost of the swimming pool. Lets assume the appraiser estimates the value/cost at 50,000. In this case the purchase structure will be as follows:

Purchase price: $2,000,000
Purchase price not including the swimming pool cost: 1,950,000
The equity required by the borrower assuming 80% loan to value: $390,000 + $50,000 = $440,000
The gurantee fee of 3% is then waived on this loan

CASE 2- Hotel refinance of 2,000,000: similar to Case 1 above, lets assume that the appraiser estimates the value of the swimming pools to be 50,000. The calculation of the loan will be as follows:

Value by the appraiser for the hotel: 2,500,000
Loan to value not considering the pool: 80% (2MM/2.5MM)
Value considered without the swimming pool: $2,450,000
Loan to value withouth the pool: 81.63%
Equity injection required by the borrower to reduce the LTV to 80%: $40,000 ($2.45MM x 80% - 2MM)
Total loan to be refinanced: $1,960,000 where the borrower pays down $40,000 of the original $2MM loan to lower the loan amount to $1,960,000.

Tax benefits for Small Business
The benefits consists of health insurance deductions for small business hotel owners and equipment cost deductions. Further information on these items will be available in the next few days.

It is important to note that the hotel industry was the first victim of the 2008 recession and is seemingly the first saved sole in 2010. With this bill making credit available, specially through 30 billion dollars allocated by the government and available to the community banks for lending to small businesses, many hotels with loans over 2MM with high interest rates, many with PIP demand by the franchisors, and or those with high rate credit or private loans incurred during the tough past few years, will be able to now refinance with a 7a loan (even if they currently do have a 7a loan).

the information on this page will be updated on daily or weekly basis as information becomes available through the Small Business Administration.