Buying A Bed And Breakfast? SBA Loans In Trouble

The SBA Loan Programs in 2008 have shriveled up, and that has caused both buyers and sellers of Inns real problems in making deals happen. The SBA has this week taken steps to make loans available again. Now we have to wait and see if these very important changes will solve this problem. Without this solution, and SBA loans once again being made, the purchase and sale of Bed and Breakfast Inns will continue to be slow and difficult for buyers and sellers alike. Here are the details:

The SBA 7(a) and 504 Loan Programs have for many years provided an excellent source of mortgage lending for the acquisition of Bed and Breakfast Inns across the Country. In fact, these are the programs of choice for many Inn buyers. The SBA 7(a) Program provides a bank or other lender a loan guaranty of 75% of the overall loan. While costs are high and paperwork detailed, this is a good way for banks to be more secure in their lending, especially to borrowers who have not been in the bed and breakfast business before.

The SBA 504 Program, on the other hand, can provide below market interest rates on a portion of the overall secured mortgage loan to acquire an Inn or Bed and Breakfast. The 504 loans between 30% to 40% of the overall package on a second mortgage basis, and a bank or other lender provide takes the top 50%, leaving the buyer putting up 10%-20% equity (most bed and breakfast inn acquisitions will require 20% equity). The SBA portion of the loan is done on a fixed rate 20-year amortization basis, and because certain expenses are included in the interest rate, it actually decreases a bit every five years to maturity. There are some prepayment penalties involved in the SBA portion of the loan, and the costs of securitization and sales of the loans on the market are high (but includable in the loan). However, overall, this financing vehicle has in the past worked very well for Inn buyers. Until now . . . .

Last month we learned in the Wall Street Journal that overall SBA lending was significantly down in Fiscal Year ending 9/30/2008 over FY 2007. The 7(a) loan program was down over 30% from FY 2007, while the 504 Program dropped almost 17%. The reason was two-fold. First, related to the overall Economic Financial Crisis, the interest rate on SBA loans was based on the prime lending rate which has been decreasing as the Fed has sought to reinvigorate the credit markets. Most bank lending today has been based on the LIBOR which is much higher, thus making the SBA loans difficult to sell. Second, there were many issues for packagers of the securities to deal with based on the SBA rules. For more information see the full article SBA-Backed Loans Dry Up - WSJ.com.

Now we learn that the SBA has finally taken action to solve some of these problems. As of November 13, 2008, the SBA lending programs will now be pegged to LIBOR, and the SBA has also by regulation fixed other technical issues in the securitization and sale of the SBA loans. For the full story, please see: Independent Street : SBA Amends Lending Program to Help Small-Business Borrowers.