The new Small Business Jobs Act has some interesting aspects to it that should create some liquidity in the hospitality lending arena. There is one significant, albeit little understood, addition which should encourage anyone who is thinking about purchasing this type of property to become more active in their innsearch. This is a bit technical but very important to understand, so please bear with me.
For the next two years or so, SBA 504 loans will offer a guarantee to the ultimate holder of the loan, which will range from 75% to 90% (depending upon when the loan is funded in the secondary market, and which for all intents and purposes is more likely to be 75%).
The guarantee allows the bank which originates the loan to sell off the majority of the loan (the piece that carries the guarantee) into the institutional market. These debt instruments are very liquid and typically carry a premium of approx 65 basis points over the 10 year treasury, so imagine how low the borrower's rate is on this!
The creation of this secondary market makes the loans very attractive for the originating bank for a couple of important reasons: first off, they are able to reduce the risk of the loan by moving the bulk of it off their books, and secondly, they earn the origination fee on the entire amount of the principal funded.
This provision in the SBA's SOP (Standard Operating Procedure---sounds like whoever came up with that acronym was in the military, doesn't it?) is due to sunset (as in go away) in late 2012, or until 2 billion in loans are funded, whichever comes first.
Now, once you've chewed on that for awhile, you'll understand why it's so important. Everyone knows that the banking industry is in the toilet, so if there's a way to reduce their portfolio risk (which comes about because they will have a larger number of smaller loans) AND earn some serious fee income for doing the origination, think how attractive that will be for the banks!
Moral of the story? Get out there and start looking for the hospitality property you dream about. Now is the time!
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