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

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The Recovery Act SBA Provisions Benefiting Hotel Financing

Updated 2/17/2011
SBA 504 refinance regulations are issued by SBA. Read more...

Updated 12/30/2010

The fee waiver and the 90% guarantee ended in 2010. SBA guarantee fee will now apply to all SBA loans.

Updated 07/15/2010

First pool for the 504 guaranteed first trust deed loans started on July 15th. Read more about this program update...

Updated 05/25/2010

Through notice number 5000-1153, SBA announced today that:

Unless congress extends the authority for the 90% guarantee, all loans in the SBA queue will be funded as 75% guarantee
All SBA fee waivers are in effect until September 2010 but unless funds are allocated by the Congress, the SBA loan fees will apply unless the loans are placed in the SBA queue in which case, if and when the funding is allocated by Congress, the loans will be funded in the order that were placed in the queue.
Updated 04/15/2010

Bill HR 4851 SBA Loans Fee Waiver Extension: Appropriates $80 million for continuation of reduced fees for Small Business Administration (SBA) 7(a) loans and extends their authorization through May 31, 2010. Again, please make certain you contact the office of your Senators urging support for .2869.
Updated 03/26/2010

Bill HR 4938 introduced by José Serrano was passed by the Senate on 3/25/10 and is awaiting the signing by the president. This bill will extend the fee waiver and the 90% guarantee to the end of April 2010. It is however expected that the S.2869 bill will be approved by then or soon after and extend the benefits to the end of the year. Pls make certain you contact the office of your Senators urging support for .2869.

Updated 12/19/2009

This Saturday morning, the 19th of December 2009, in a surprisingly quick move, the senate passed H.R.3326 defense bill. Section 1006 of this bill pertains to extending the SBA Stimulus fund allocation until February 2010 as follows:

Sec. 1006. (a): There is hereby appropriated $125,000,000, for an additional amount for `Small Business Administration--Business Loans Program Account' for fee reductions and eliminations under section 501 of division A of the American Recovery and Reinvestment Act of 2009 (Public Law 111-5) and for the cost of guaranteed loans under section 502 of such division: Provided, That such cost shall be as defined in section 502 of the Congressional Budget Act of 1974.

In short this bill extends the stimulus package allocation for waving guarantee fee on SBA loans and will extend the 90% guarantee until February 2010. In this economy, both borrower and lenders will significantly benefit from this fund. Money is tight and borrowers are having a hard time coming up with nearly 3% SBA guarantee fee. Additionally, lenders are not motivated to offer hotel loans and the guarantee of 90% will provide enough incentive, albeit for another couple of months.

Update: 10/20/2009

SBA Creates Secondary Market Guarantee Program for 504 First Mortgage Loan Pools: (Implemented on 10/28/09): SBA just announced the creation of the secondary market guarantee for the first trust deeds of the 504 loans. Before going into more details, it is important to note that 504 hospitality loans are structured such that 50% of the project cost is funded by a lender as a first trust deed and 30% to 35% of the remaining cost by the SBA as a second trust deed totaling 80% to 85% loan to cost/value.
Beginning the last quarter of 2008, the secondary market for the 504 first trust deeds started to shrink to the point where in the past few months the secondary market has nearly become non-existent for these loans.

Under this new SBA ARRA program, a lender will hold 15% of the loan on the portfolio and sells 85% of the loan in the secondary market. The pool originators now have to assume 5% of the risk and the SBA will guarantee the remaining 80%. The loan qualification is retroactive and covers the loans funded since 2/17/09.

On the positive side, this will mean that a lender will make a loan with 7.5% risk (15% of the 50% first trust deed). This should make wary lenders feel more comfortable lending to hotel assets. However, there are immediate concerns such as:

While the notice is issued now, the details are forthcoming within the next 60 days. It is not then expected for the lenders to fund any loans through this program until the details are provided by the SBA and reviewed by the lenders.
Since the detail has not been provided yet, the reaction of the lenders and the secondary market to the upcoming detail is unpredictable.
The Obama administration has been giving indications that any upcoming financial market regulation must compel intermediaries to share the risk by having a stake in the fate of the instruments they structure. As expected however, there is rumor now that the secondary market originators are not thrilled about the news that they now have to assume 5% of the risk of these 504 loans and they either will avoid participating in the program or will pass the cost of this risk to the lenders by reducing the premium. This will have repercussions as the lenders may just decide to continue focusing on 7a and USDA loans that currently offer higher premiums.

News Release from SBA- 10/21/2009

Increasing SBA 7(a) loan limit from 2 million to 5 million: (Not implemented yet) For us in the hotel industry this is the most important part of the announcement. Assuming an 80% loan to value, soon a purchase of 6.25 million could hypothetically be structured through the 7a guaranteed program.

This program is favored by both lenders and borrowers. Constrained by insufficient liquidity and jittery about lending on hospitality assets, the lenders can sell the guaranteed portion in the secondary market for a premium and only keep the unguaranteed portion on the books. As an example, a bank that makes a 1.5 MM 7a loan can sell the 90% guarantee in the market, recuperate 1.35MM and keep only $150,000 on the books with far less risk exposure and reserves. A borrower who had used 2 million of SBA before has now additional 3 million and can take advantage of possibly hotel acquisition opportunities of our lifetime. A borrower may use this 5 million for multiple purchases or refinances as long as the total SBA loan remains at 5 million.

Increasing SBA 504 2nd trust deed limit from 2 million to 5 million: (Not implemented yet) With the secondary markets nearly closed to SBA 504 first trust deeds, this increase will have limited effect until the securitization on the first TDs is implemented by the SBA. Once that happens and the secondary markets open to these loans, a purchase of around 16MM may hypothetically be structured as follows:

Acquisition cost: 16.6 million
First Trust Deed @ 50% of the purchase: 8.3 million
2nd Trust Deed by SBA @ 30% of the purchase: 5 million
Injection by the borrower: 3.32 million (Expansion requires 15% injection)

SBA 504 loans are very lengthy and process intensive and the 2nd TD has two closings and a 10 year prepay. It is a relief that loans up to 5MM can soon be done through 7a program.

Having said all of these, SBA is not a lender itself and is merely setting the guidelines. The lenders are still facing the following issues which help perpetuate the existing tight credit market:

FDIC is now encouraging the lenders to reduce their commercial loan portfolio concentration which is completely out of step with these SBA efforts.
Continued job losses are preventing the lenders from being optimistic that a recovery has started.
Secondary markets have only recently opened for guaranteed loans such as 7a and USDA, but in general are not being active for conventional note purchases.

However, many loans of up to 5 million that otherwise had to remain in queue for the credit markets to open up are going to have a chance. This is specially beneficial for those who had to use the painful USDA B&I loans, were searching hopelessly for a 504 lender, or had to refi an existing loan that was over 2MM.

Fee Elimination for 7(a) and 504 Programs: (IMPLEMENTED on 3/17/09)

Expanded 504 Refinancing Project: (IMPLEMENTED on 6/24/09) Allows borrowers to refinance an existing eligible hotel loan as part of a new 504 small business expansion project. Until now, refinancing through SBA was only possible in very special circumstances. Read more on this program...

7(a) Secondary Market Lending Authority: (NOT IMPLEMENTED YET) Increases liquidity in the secondary market for SBA loans by directly lending money to brokers to purchase SBA 7(a) loans. Although the impact is very significant due to the fact that the secondary market has dried up for government guaranteed loans, the impact on hotel industry is less visible than the similar provision for the 504 loans as most hotel loans require larger loan amount generally structured through 504 program..

Up to 90% on Guarantee on 7(a) Loans: (IMPLEMENTED on 3/17/09) Banks are able to sell the guarantee portion of an SBA 7(a) loan in the secondary market, increasing their liquidity, and offering more loans.