||Hotel Loan Programs
|Update and Review of SBA Changes that may impact Hotel Financing
SBA 504 Refinance and First Mortgage Pool Program both expired in September
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 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 issues the SOP version E effective June 1, 2012. Two most important changes are as follows:
Page 133: Refinancing Personal Debt
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.
Page 139: Change of Ownership
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.
SBA 504 refinance regulations are issued by SBA. Read more....
First pool for the 504 guaranteed first trust deed loans started on July 15th. Read more about this program update...
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