Editor’s note: This is part of a monthly series of Q&A articles from lenders who provide capital to the hotel industry. Hotel News Now provides the questions each month.
Please explain the various SBA programs, and note the programs in which PMC participates.
The primary SBA loan programs that a hotel owner would use are the SBA 7(a) and 504 loan programs. SBA 504 loans involve a conventional first lien and second lien up to $5 million that is made by a Certified Development Company and 100% guaranteed by the SBA. The project cost for a 504 loan can include real estate, construction and other fixed assets. The 7(a) program, which is SBA’s flagship program, can also include working capital, franchise fees and inventory. This program has the most participation among lenders and is the program that PMC Commercial Trust is currently focused on. A lender makes a loan up to $5 million that is generally 75% guaranteed by the SBA.
How do owners know if they qualify for an SBA loan?
The primary SBA size standard to qualify as small in the hotel industry is a total of $32.5 million in average annual sales of the subject business and its affiliates, so many hoteliers can qualify. You can also use an alternate size standard if tangible net worth, including affiliates, does not exceed $15 million and net income does not exceed $5 million. Keep in mind that tangible net worth can be much lower than fair market value net worth as it is based on book value net of depreciation. While there are some exceptions, it is much easier to qualify if the majority owners and operators are U.S. citizens or legal permanent residents.
What are the typical terms of an SBA loan?
For hotels, up to 80% to 85% financing is typical in both loan programs, although the 7(a) program has more flexibility. If the majority of the loan proceeds are for real estate, the 7(a) loan would generally have a variable rate, 25-year term and amortization, and a prepayment penalty of 5% the first year, 3% the second year, 1% the third year and none thereafter. The second lien 504 loan would be 20 years fully amortizing at a fixed rate with a prepayment penalty that declines to zero after 10 years. The terms of the conventional first in front of the 504 loan would be set by the lender.
What’s the most important piece of advice you would give to a borrower who is seeking an SBA loan?
Borrowers need to understand that there are specific requirements that must be followed to participate in the SBA loan programs. Lenders must be sure that a borrower meets all of the SBA eligibility requirements, and therefore borrowers need to be prepared to supply what is being requested. Be sure your lender has experience with your type of business/property.
What tends to be the biggest obstacle for borrowers when it comes to SBA loans, and how can lenders avoid that obstacle in the future?
SBA loans have a reputation for taking a long time to close. We have had great recent success with providing the borrower with timelines to provide us with certain information in order to meet the desired closing date for the transaction. With cooperation from all parties, SBA loans can be closed quickly. We have also overcome this obstacle by offering a short-term bridge loan until all of the SBA documentation can be completed.
Laurie Ivy has been Senior Vice President of Business Development with PMC Commercial Trust since 2001. She has been with PMC since 1993 when she was hired as an underwriter. Subsequently she was added as a member of loan committee and later promoted to Vice President, Credit where she supervised PMC’s underwriting department. In her various roles over the years with the company, she has worked on all phases of the loan process from originations through closing and has assisted with servicing and collections as well. Her experience includes loans to many different types of businesses utilizing both PMC’s conventional and SBA loan programs. With PMC, Laurie has made business loans for refinance, new construction, conversion, expansion and acquisition. Laurie is a CPA and was a member of the Deloitte & Touche audit department before she joined PMC. Please feel free to contact her at her direct line at 972-349-3207 or at L.Ivy@pmctrust.com.
PMC Commercial Trust (“PMC”), a wholly owned subsidiary of CIM Commercial Trust Corporation (NASDAQ:CMCT) a diversified real estate investment trust (REIT), has provided thousands of loans to businesses throughout the United States. PMC has specialized in hospitality lending for over 20 years. As a nationwide direct lender, PMC currently originates loans through utilization of the Small Business Administration 7(a) government lending program. Based on PMC’s experience and track record, it has earned the distinction of being an SBA Preferred Lender, the highest achievable recognition. This designation gives PMC the authority to quickly approve and close loans while providing personalized service to borrowers.