Get Ready! The SBA 504 Refinance is Back!

On May 26^th the Small Business Administration (SBA) made the 504 Refinance Program permanent.  This is great news for hoteliers!

How it Works

The SBA 504 Refinance loan program offers up to 90% loan to value for real estate property.  The effective interest rate on the SBA’s portion of the loan is low, as low as 4.22% in June, and is always fixed for 20 years.  It is also possible to get cash out for operating expenses with up to 75% loan to value.

If refinancing real estate only with no cash out, a bank or private lender funds 50% of the Project costs, while an SBA-approved Certified Development Company (CDC) finances 40%, and the borrower puts in equity of 10%. Read Forbes article.

The ‘Wall of Maturities’

We are nearing ten years since hotel values peaked in 2006-2008. Many of these hotel loans are now coming due in what has been called a “Wall of Maturities”. Read Huffingtonpost article. Unfortunately, in some cases hotel values have not appreciated much or at all in that time. The high loan to value for the 504 Refinance program is good when hoteliers do not have a large amount of equity. The SBA 504 Refinance program is applicable for maturing conventional and smaller CMBS loans. Even though the 504 Refinance requires personal guarantees from the borrowers, unlike CMBS which is non-recourse, it may still be a good option for some hotels. 

Lower Debt Service

The low interest rate, fixed for 20 years is another advantage of this program. Hoteliers who refinance with the SBA 504 from higher interest conventional loans can reduce the cost of their debt service, thereby increasing operating income. At a time when so many brands are announcing new brand standards, freeing up financial resources is a boon to hotel owners.  Also, don’t forget that the Federal Reserve will likely raise interest rates a second time this year, with incremental increases surely to follow. This is a great option to secure a low interest rate while they are still historically low.

Talk to an Expert

With over 20 years of experience personally in arranging hotel financing, I know every situation is different. There are restrictions to eligibility and use of funds for the 504 Refinance. If you have a coming loan maturity or are considering refinancing, talk to an experienced mortgage broker to see if the 504 Refinance would work for you. I can’t recommend anyone more highly than Lynda Drehmer of MBA Capital Funding, affiliate company to MBA Hotel Brokers. Lynda has over 30 years of experience in banking and in depth financing knowledge specific to the hotel industry. Learn more here or contact Lynda@mbacapitalfunding.com.

Or email me with your comments or questions on your hotel financing situations. 

‘Till next time,

Charlie Fritsch

www.mbahotels.com

www.mbacapitalfunding.com 

Direct Booking Increases Your Bottom Line

Hotel values are driven by room revenue and net income.  So whether you are considering selling or refinancing now or later, the more revenue your hotel generates, gross and net, the greater it's value and the greater your exit profit.

Last month Choice Hotels became the latest Franchisor to join the so called ‘Direct Booking Wars’.^[1]  Earlier this year Hilton launched its “Stop Clicking Around” campaign and claims that HHonors enrollment on its website is up 90% since starting the campaign.^[2] Most other major franchisors also have direct booking initiatives including Marriott, Hyatt, IHG, and Wyndham.

In addition to promising the ‘Best’ rate, some Franchisors offer benefits like mobile check-in and free Wi-Fi when customers book direct. 

As a franchise hotel owner, these Franchise wide campaigns are a win-win for you and your franchisor. The cost of Online Travel Agencies has always been the burden of the hotel owner. The commission structure for OTAs can range from 10 – 30%. In addition, OTAs with the merchant model, that collect the consumer’s fare up front and then pays the hotel a pre-negotiated net rate, the cost of the OTA is never even accounted for in the P&L because you only show your income for that room sale NET of the OTA. Up until now the cost of OTA distribution has been largely unchecked.^[3] To the extent that the new push for direct booking moves rooms booked from the OTAs to your direct franchise channel, it will add to your hotel’s income and bottom line.

According to one report by Hospitality Upgrade, direct bookings are about 9% more profitable for the hotel industry, than OTA bookings, when costs including commissions, transaction fees, loyalty fees, and other direct channel costs are considered.^[4]

Marriott says it’s too early to tell the success of their members-only rate, but that early response is positive.^[2] For the hotel owner too, we will just have to wait and see how the direct booking campaigns affect net profits, and influence hotel valuations, but we would expect any movement of revenue from OTAs to direct channels to be positive for hotel profits and values.

Have you seen any changes in reservation trends at your hotels since the start of the ‘Direct Booking Wars’? What are your thoughts on the push by franchisors? And the push-back from the OTAs? Remember to share if you like this blog.

Till next time;

Charlie Fritsch

See Hotels for Sale at www.mbahotels.com
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