In September of this year, two temporary programs introduced as part of the government’s push to stimulate the economy came to an end: 

• The 504 Refinance Program was introduced in 2010 and allowed many hoteliers with loans larger than the SBA $5 million limit to refinance through this program. In this structure there were two loans, one from the bank and one from the SBA with the limitation that the SBA loan could not have be larger than the bank loan. A $12 million loan could then be refinanced with the bank pledging in $7 million and the SBA in the 2nd position at the maximum $5 million SBA limit. The rumor was that the program may be extended during the lame duck session of the congress, but seems to me that it will not go beyond a rumor.
  

• The First Mortgage Loan Pool Program allowed a lender to sell 85% of a 504 first trust deed loan it orginiated to sell in the secondary market. In the previous example, the lender that made the $7 million first loan would then only hold $1,050,000 of the $7 million on the books. This would reduce the lender’s risk exposure specially fon hospitality assets, bring immediate revenue realization by selling the loan 85% at high premiums, free up the lender’s funds to lend on new loans, and reduce its concentration on hotel assets.

The degree by which the expiration of these two programs impact our industry is debatable. I however believe that with continued anemic credit availability, there will be noticable impact on our industry. After all, Scientific Capital had multiple projects that were not qualified for other programs, were easily financable through the 504 refinance program, and did not make it on time with us back on the drawing board to determine the financing strategy.

The 7(a) program is still going strong and some portfolio lenders who do not sell in the seconary market offer lower spreads on very attractive low risk hospitality transactions ranging from 1.5% to 2.0% over PRIME index (PRIME currently at 3.25%). On more complex projects the spread remains in the 2.25% to 2.75% range mostly because the lenders who are willing to digest more complexity are the ones selling their loans in the secondary market and expecting to gain higher returns by charging higher rates. 

SBA guaranteed loan proceeds may be used to refinance debt in the personal name of the owners, such as a Home Equity Line of Credit (HELOC) or credit card debt that was used for hotel purposes. The borrower must certify that the amount being refinanced was used exclusively for hotel purposes and provide appropriate documentation, such as a copy of the note and/or current loan statement, to demonstrate that the debt was, in fact, used for the hotel purposes. For example, a sole proprietor may demonstrate that the debt was used for hotel purposes by providing a copy of the note and documentation that shows the debt is reflected on the hotel balance sheet and/or the interest deduction is reported on the Schedule “C” not the Schedule “A” of the proprietor’s tax return. If the interest deduction reported on the Schedule C includes multiple debts, then the applicant must provide a copy of the appropriate IRS Form 1098 related to the debt being refinanced.

The difference between a new hotel acquisition and the change of ownership in acquiring a hotel is that in a new purchase a buyer does not have any existing ownership in the hotel being acquired but in change of ownership, the borrower has an exisiting ownership interest in the hotel and buys out other partners and becomes 100% owner. The major requirements are:

 - The purchaser cannot buy portion of the ownership of the hotel and need to become 100% owner of the hotel
 - The seller may not remain as an owner in the hotel. He can consult if needed for maximum of 12 months including all extensions
 - The purchaser's equity in the business will be valued through an appraisal and generally needs to be at 25%

Under the change of ownership, the SBA loan can be used to finance the exisiting debt and the equity in the hotel, if at the generally required level of 25%, would be used to meet the equity injection of the buyers. In this case the SBA loan is used to purchase the stocks from the departing owner(s) called a stock redemption resulting in the buying stockholder(s) owning 100% of the stocks outstanding. The associated debt may then be refinanced as part of the change of ownership assuming the loanis eligible under the SBA.

Many hoteliers reach a retiring age and want to transfer their hotel to their children. Change of Ownership by SBA can be helpful as the equity in the hotel is used as equity injection for the children and the purchase does not require new equity injection (downpayment)  by the children for the purchase of the hotel.