How higher rates have changed SBA lending

Hotel Investment Today is writing a series featuring interviews with hospitality experts about the current state of the hotel refinance market. Today, we interviewed Laurie Ivy, senior vice president of lending for PMC Commercial Trust. For Part 1 with JLL’s Kevin Davis, click here. For Part 2 with Peachtree Group’s Jared Schlosser, click here. For Part 3 with Berkadia’s Michael Weinberg, click here. For Part 4 with CBRE’s Michael Straw, click here. For Part 5 with Arriba Capital’s Ryan Bosch, click here. For Part 6 with Driftwood Capital’s Carlos Rodriguez, click here. For Part 7 with Colliers' Mark Owners, click here. 

NATIONAL REPORT — In today’s hospitality capital market, an optimistic view of a floating-rate loan is that interest rates will lower in the coming years, so now would be a good time to get one. However, borrowers are still getting nervous, according to one SBA lender.

“I keep trying to tell people that [rates are going to be coming down], but they still get nervous because we’ve been thinking that for a while,” said Laurie Ivy, senior vice president of lending for Dallas-based PMC Commercial Trust.

“We have had a hard time convincing buyers and referral sources that now’s the time to get in where they can get in front and at prime plus one,” she said. “As those rates go down, they’ll be at a lower spread. It’s a 25-year fully amortizing loan.” 

PMC, which has been in hospitality lending for 30 years, is one of only 14 non-bank lenders that provide SBA 7(a) loans, which can be used for hospitality assets or other owner-occupied commercial real estate. The 25-year, fully amortized loans can be used for acquisitions, refinancing, or renovations and can range from $750,000 to $5 million. The loan-to-value ratio is generally around 80% and can go as high as 85% (the government guarantees 75% of the loan). The program is designed to help people who couldn’t get a regular bank loan.

The loans have favorable terms and can’t be called back for debt coverage, covenants, or loss in value as long as the borrowers make their payments and pay taxes.

Ivy said spreads have been depressed for SBA loans, but the variable rates still make borrowers nervous. “Borrowers are hesitant to make those kinds of loans. They’re generally trying to get into a lower fixed rate,” she said.

The SBA 7(a) loans are used primarily for acquisitions, where borrowers purchase a property with poor historical performance numbers in an attempt to turn it around. Ivy said about a quarter of borrowers are first-time hospitality owners, but many of them own other properties or have owned them in the past. There might be three to four partners, but it’s not usually a complex ownership structure.

“They’re generally purchasing a hotel or motel where the cashflow hasn’t been great historically, and they feel that they can make improvements with their management or maybe do some renovations, and those can be included in the project cost to complete a PIP and just improve the property overall.”

If a borrower is looking to refinance, they are most likely going to do a non-SBA loan, Ivy said.

Borrower hesitation

Ivy said the biggest difference for SBA loans is more hesitation for the borrowers. “They’re more concerned about rising interest rates and other rising costs,” she said. “So, it seems like our business has slowed because fewer acquisitions are going on, and we’re seeing more frequently that buyers will back out or change their minds.” 

They’re more concerned about rising interest rates and other rising costs. So it seems like our business has slowed because fewer acquisitions are going on, and we’re seeing more frequently that buyers will back out or change their minds.

Laurie Ivy

Share this quote

Ivy said buyers back out because they feel like the deal isn’t penciling or are just nervous once they dig into the details. “The SBA borrower doesn’t often do a lot of analysis. They just have a gut feeling… They’re not doing a complex analysis on how things are going to turn out with the property,” she said. 

Ivy also said there’s a lot of competition for the SBA 7(a) loans because of the government backing. “While banks may be pulling back some, it doesn’t feel like there’s less competition because there’s fewer deals to go around,” she said.

While the SBA lenders are responsible for servicing the whole loan, the government also incentivizes lenders by supporting a secondary market where banks or life insurance companies can purchase the government-guaranteed portion of that loan. So, for a $5 million project, PMC could make a $4 million loan (80% LTV) and then sell 75% of that on the secondary market a few days later.

In general, newer assets or ones in urban areas are too expensive to fit within the $5 million threshold, Ivy said. So, the properties are older and generally in tertiary or even rural markets. “A newer property for us would be [one built in] 2009, but some of them might be built in the 1960s, which would be one the reasons why conventional financing wouldn’t be available,” she said. 

A PIP is generally included in the SBA 7(a) financing (as opposed to borrowers having to use equity to fund part or all of it). “We like to include the complete PIP in the project cost, and we’re still doing up to 80% of that total project cost, as long as the deal make sense,” Ivy said. “In some cases, they might need a little more equity, but not a lot more. It does make it difficult when there’s a large PIP and that would deter us from making a loan.” 

She said while refinancing doesn’t make up the majority of SBA 7(a) loans, PMC is doing more refinance deals because there are fewer options. “Most loans we do are acquisitions. So, there could be a story to tell about improving the management,” Ivy said. “But in a refinance, it’s more difficult. You’re not changing the management. If you could do it better, why wouldn’t you have done it previously?”