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Update on Stimulus Bill’s SBA 504 First Mortgage Loan Pool Program for Hotels

July 15, 2010

A review of the 504 hotel loans
SBA 504 loans are structured as a first trust deed conventional loans offered by lenders at 50% of the hotel project cost and 35% as a 2nd trust deed offered by the SBA. This program is focused on loans over 2MM that cannot be financed through the SBA 7a program and is generally suitable for acquisitions. The only case where the loan is used for a refinance is when there is an expansion element to the project with the new loan at or larger than twice the existing loan. So if your current loan is say 1MM, you need to borrow 2MM or more with a 1MM+ for the expansion/renovation and the new loan cannot be below 2MM. If you do have a 504 loan, the first loan can be refinanced, but any cash out has to be used for the improvement of the property only.

Why it has been difficult to obtain 504 loans?
With the secondary market coming to a halt late 2008, banks that for years were funding commercial loans by selling them in the secondary market had suddenly no buyers. The government introduced TALF to open the secondary market with focus on the guaranteed notes such as the USDA and the SBA 7a. The 504 non-guaranteed first trust deed loans remained orphans. The Stimulus bill then introduced a program to guarantee the first TDs to make them sellable in the secondary market. After nearly a year and a half, seven months before the program expires, the first pool of these loans is to start on July 15th, 2010.

Are 504 loans readily available now under this new program?
Not entirely as there are few issues:

The Stimulus Bill requires the Wall Street brokers to keep 5% of the loan on their books. Unfortunately, they are neither structured nor are sufficiently capitalized to do so. This prevented the program from getting off the ground. As of today, I am not aware of any broker who has started buying these loans.
A national bank has become a pool originator to sell these through Merrill Lynch but this has been an arrangement with select SBA offices in a consortium. Hardly any lender is aware of this arrangement; certainly the banks that I work with nationally are not fully aware of it and I had to send them information for the first time few days ago. For a bank to get with the program, it requires a lengthy process of reviewing the legal documents, the loan pool contracts, etc. With few months remaining to the expiration date of the programs, lenders may not find it profitable to go through the whole process for a chance of funding a loan or two.
The lenders may as before sell a 7a or USDA loan in the secondary market at a very high premium. This program is offering possibly one third of that premium to a bank rendering it very unattractive.

The availability is then through the national pool originator and the SBA consortium.

What are the expected rates for the first trust deed loans?
The quarterly adjustable rates are averaging 5.75% to 6% while the fixed programs are generally for 5 years and are ranging from mid 6% to 8% depending on the source of funds and the project

With the expiration of Feb 17, 2011, what is the deadline for financing a loan under this 504 program?
Let’s work backwards from Feb 17th, 2011:

Expiration date where an SBA 2nd loan needs to fund: February 17, 2011

Latest time when an escrow on a hotel loan has to close to allow a 3-month timeframe for the SBA 2nd loan to close just before or on February 17, 2011 is then November 17, 2010

Latest time a loan process can start allowing a process time of 3 months to close an escrow on or before November 17th, 2010 is then August 17th, 2010.

This means that any loan proposal has to start as an official loan process around middle or late August 2010 giving any hotelier nearly a month from today to make sure that the project is qualified before officially starting the loan process.

What projects will be qualified under this 504 program?
Due to the short timeframe left, no renovation or construction projects are going to be considered. At this time the focus is on straight purchases or refinance of the first TDs of 504 loans where the 2nd SBA trust deed funded after 2/17/2009 (if there is a such a refinance case). Probably if there is a chance to finance a project through this program, it would be an acquisition of a positively cash flowing stabilized hotel with reasonably strong sponsorship.

Is it possible for the program to be extended?
There is a chance that the program may be extended to August 2012 through the HR 5297 Bill, the same bill that is the 3rd or 4th generation of some original bill that was going to raise the SBA limit to 5MM. The Bill has passed the House, but will go on the Senate floor next week.