Is your Hotel Loan a good fit for a SBA 504 refinance?
Benefits of a 504 refinance
Recent rule changes allow you to refinance your existing SBA 7(a) loan into a new SBA 504 loan at up to 90% LTV.
SBA 504 loans have a “below market” 20 or 25-year fixed rate second mortgage allowing you to convert at least a portion of your existing mortgage to a fixed rate.
The other portion could be fixed or variable, depending on lender options. Floating rates in this scenario are typically tied to treasuries and well below current 7(a) floating rates that are tied to prime.
A blended rate should produce significant interest rate savings. Typical 7(a) loans are floating rates, currently between 10% to 12% with potential to increase further. This offers a blended fixed rate between 7% and 8%.
Hotels are eligible for up to 90% LTV.
Often you can pull cash out either to fund working capital or complete renovations – up to 20% of appraised value or 85% LTV, whichever is less. This means that Hotel Owners can recoup existing equity as working capital at a low interest rate with longer repayment terms, making it a very affordable option.
Consider this scenario:You have a $4,000,000 loan for your hotel. Your interest rate at origination of your loan was 6.0%, but your current interest rate has increased and is now 11.25%; as a result, your monthly cash flow has declined significantly. By making the switch to an SBA 504, you should be able to save close to $116,000 a year, or $9,669 a month. That’s a significant amount of cash not in your pocket!
Is a refinance to SBA 504 loan the right move for your hotel loan?
For Hotel Owners, the recent rule change that allows SBA 7(a) loans to be refinanced with an SBA 504 to up to 90% LTV is welcome news.
Since March 2022, the Fed has increased its benchmark federal funds rate at 11 consecutive meetings by a total of 5.25 percentage points. That’s the steepest spate of rate hikes in forty years. Now is an excellent time to initiate this changeover to significantly lower your payments and increase your bottom-line cash flow.
SBA 504 loans have fixed interest rates for up to 25 years, and as the borrower, you are allowed up to 20% of the new value increase in cash-out or working capital. You’ll get a longer repayment term, a fixed interest rate, and even have an opportunity to cash out equity in the building to help complete a PIP and grow your business. Your rates could be reduced from your current variable rate to one of the lowest rates on the market. For the average Hotel Owner, this makes a huge difference.
While SBA 7(a) loans are great for small businesses, refinancing an SBA 7(a) to an SBA 504 will improve your cash flow. You will have a longer-term repayment schedule, lower-than-market fixed interest rates, and lower proprietor-equity requirements with between 85 and 90% financing. With this move, you may be able to recoup your current equity as working capital at a lower interest rate and have extended repayment periods. New SBA 504 refinance guidelines make it even easier to qualify for the program if your existing debt is eligible.
There are numerous rules regarding eligibility, but the program allows Hotel Owners to convert floating rates into long term fixed rates and the 504 does not require outside collateral, so you should be able to get any outside collateral released if you qualify. Here are the basic SBA 504 Refinance Rules as they apply to refinancing an existing SBA 7a loan.
If you can answer YES to the questions below, your Hotel deal may be a good fit for a 504 Refinance:
Must have owned the Hotel for at least two years.
Your existing debt must be 6+ months old.
Your loan must be current (not more than 30 days past due) during the last 12 months.
Current lender is unwilling or unable to modify existing loan.
Thanks to its beneficial loan terms, most borrowers can lower monthly payments by refinancing to an SBA 504 loan. Before you apply, it is important to understand some key points about the SBA 504 refinance option that may be different than other small business loans, including eligibility and the application and loan processes.
Lodging Partners has teamed up with GWT Capital to provide hotel financing solutions. It’s important to note that refinancing an SBA 7a loan with an SBA 504 loan can be a complex process. It is a good idea to get us involved early, so we can assist you with determining eligibility and walk you through the application checklist.
The Benefits of working with GWT Capital include:
They work as your advocate and represent you throughout the entire loan process.
They have 20+ years of experience in underwriting exclusively hotels. This helps us correctly present the case for new financing to the lender and proactively avoid pitfalls through the process (missing data, appraisal disputes, etc.)
They are dedicated exclusively to connecting Hotel Owners with quality expansion capital through administration of the SBA 504 Loan Program.
They charge industry standard fee, which is payable only if we are able to close.