What the SBJA means to Innbuyers

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!

Small Business Jobs Act Signed Into Law Today

Good news on the SBA financing front! Obama signed the 2010 Small Business Jobs Act, and highlights of the new bill with regard to SBA loans include:

Increase in the guarantees for SBA’s largest loan program (the 7(a) program) to 90% and reduction of fees for the 7(a) and 504 program – has the capacity to support $14 billion in lending to small businesses.

•Within Coming Weeks, the Bill Will Allow SBA to Support Larger Loans As Well: The bill also increases the maximum loan size for SBA loan programs, which in the coming weeks will allow more small businesses to access more credit to enable them to expand and create new jobs. The bill also

◦Permanently raises the maximum loan size for the SBA’s two largest loan programs, increasing maximum 7(a) and 504 loan size from $2 million to $5 million.

Permanently raises the maximum loan size for SBA microloans, increasing it from $35,000 to $50,000.

◦Temporarily raises the maximum loan size for SBA Express loans from $350,000 to $1 million, providing greater access to working capital loans that small businesses use to purchase new inventory and take on their next order – allowing them to create new jobs.

•Treasury Is Working to Quickly Implement the Small Business Lending Fund and State Small Business Credit Initiative: In addition to these SBA provisions, Treasury is working to quickly implement two new programs designed to support private-sector lending to credit-worthy small businesses, and expects to release further details in the coming weeks concerning applications for these programs.

◦The Small Business Lending Fund would make available $30 billion in capital to small banks with incentives to increase small business lending, potentially supporting several multiples of that amount in new credit.

◦The State Small Business Credit Initiative will support at least $15 billion in new lending by strengthening state small business programs – many of them facing budget cuts – that leverage private-sector lenders to extend additional credit.

SBA Financing Window Opens for Bed and Breakfast Inns

Good news on the bed and breakfast financing front for 2010. The SBA has opened up a window of opportunity, making 2010 a great time for buyers of hospitality properties.

SBA 504 loans now offer a bank guarantee, thereby greatly reducing default risk, which in turn is creating a more active secondary market for the loans. Banks which underwrite 504 loans may now resell up to 85% of their positions into the secondary market, and get paid 3-5 points for the privilege. Hoorah!

The "window" is slated to stay open until February 16, 2011, or when the pool reaches 3 billion, whichever comes first. The impact of this program has farreaching effect, yet is virtually unknown to all but the most informed bankers. As word gets out, we anticipate that more banks will be interested in underwriting these loans, a win-win situation for all.

Anyone still dreaming of buying a bed and breakfast may have that opportunity during the next 10 months, so go on, get out there and start looking. It's a buyer's market!