REPORT FROM THE U.S.—Interest in Small Business Administration loans has spiked considerably so far in 2015.
Year to date through 13 June, the dollar volume of SBA 7(A) and 504 loans totaled $17.5 billion, according to SBA lending data. That marks a 16.7% increase from just shy of $15 billion in SBA loans made through the same period in 2014. It’s unclear how much of that is earmarked for hotels.
Bob Coleman, editor of the Coleman Report, which tracks SBA lending data, said interest in SBA loans is so high right now that the U.S. government might hit the amount that had been authorized for SBA loans. That hasn’t happened for at least the past couple of years, he said.
“It’s going to be tight,” he said. “If they do run out of money, it will be a short-term impact, unless you’re planning on closing September 29 (one day before the end of the federal fiscal year).”
Coleman pointed to a number of reasons for the increase in SBA lending, including a stronger overall financing market and increasing lender comfort with SBA loans.
“I would say we’re in a good environment right now,” he said. “There is money available in hospitality. There are always issues from a regulatory standpoint, but banks like doing hospitality loans with SBA because there is less exposure. And there is a strong secondary market for 7(A) where they can sell loans to the secondary market, and they make a lot of money off that.”
Sand Patel, senior VP at Atlantic Capital Bank, said the lender during the past two years has done $40 million in SBA loans.
“We’re seeing a lot of interest,” he said. “People are doing higher dollar amounts and new construction.”
The SBA’s 7(A) loan program is generally used for refinancing debt, Patel said. Under that program, a lender makes a loan and the SBA guarantees 75% of any loss if it occurs. 7(A) loans have a maximum amount of $5 million with no minimum.
The 504 program, Patel said, essentially acts as a second mortgage that carries a fixed interest rate for 20 years. The rate, however, will fluctuate monthly until the loan closes. The 504 loans also have a maximum loan amount of $5 million.
Patel said he has seen borrowers maxing out, for example, a 504 loan at $5 million and then coming in with a little bit larger of a senior loan behind it in order to reach, say, $15 million in financing.
“We’re seeing a lot more action in the marketplace,” Patel said. “I think that’s a result of properties performing better” and (borrowers) being in a better position to repay loans.
SBA challenges
Going after a SBA loan doesn’t make sense all of the time, necessarily, said William G. Sipple, executive managing director of HVS Capital Corporation. The fact that SBA loans do not allow for third-party management can be a problem.
“A lot of deals are not owner-operated,” he said. “They involve third-party management.”
SBA loans also require personal guarantees, which some borrowers are not willing to submit to, he said.
In some cases, commercial mortgage-backed securities can make more sense than SBA because loan proceeds on CMBS can get down to $3 million or $3.5 million, Sipple said. CMBS loans also are non-recourse to the borrower.
“What people are looking at is if those two are both alternatives, they will tend to lean toward the non-recourse solution, even if it’s a little more costly,” he said. “The availability of non-recourse debt like CMBS debt will influence the amount of people who go to the SBA solution. We’re seeing more and more less-sophisticated owners getting into the CMBS market because of the non-recourse nature of it. It’s probably taking a little bite out of the popularity of it.”
Still, Sipple said SBA loans do have their place.
“Pre-payment is more flexible under the SBA situation,” he said. “If you do not have a completely stabilized asset or you’re looking for an ownership change, SBA can offer more flexibility. Also, the borrower does not have to jump through the hoops that are associated with CMBS.”