Renewing the SBA 504 Loan Refinancing Program

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The small business saga

by BRIAN KAISSI

Following the devastating recession of 2008, the 504 loan-guarantee program was implemented to promote economic development, business growth and job creation by increasing small businesses’ access to capital. Consequently, the program served as a lifeline to thousands of hoteliers across the country when traditional sources of funding, such as community banks, were rapidly disappearing.On September 27, 2010, President Barack Obama signed the Small Business Jobs Act into law. Included in this monumental legislation was a program to allow businesses to refinance eligible fixed assets as a part of the Small Business Administration’s (SBA) 504 Loan Refinancing Program.

Unfortunately, this vital program did not become fully operational until February 2012. The program then expired on September 27, 2012, due to a pre-existing sunset clause in the stimulus bill, stripping hoteliers and small business entrepreneurs of their ability to refinance qualifying existing debt.

Though the program was eliminated shortly following its inception, its impact on small business growth was indisputable. In 2011 and 2012, more than 2,700 small businesses refinanced nearly $7 billion in old, expensive debt, encouraging job creation and reinvestment in local businesses.

As a result, the Congressional Budget Office (CBO) scored the program at zero cost to the federal government.

Heetesh Patel, AAHOA’s current Mid-South Regional Director, is one of the many AAHOA members who utilized this program and can attest to its importance.

“I refinanced a hotel with a $1 million [SBA] 504 refinance loan. This loan prevented us from having to put additional equity into a hotel project that was already [cash-flowing] well,” Heetesh Patel said. “We used this savings to build another hotel, which helped create 35 full-time jobs along with 150 construction jobs, and gave additional property tax and sales tax revenue for the local municipality and the state of Tennessee.”

Heetesh Patel added that the reauthorization of this program will give AAHOA members an additional avenue to properly capitalize their existing hotel and continue to expand their business to future projects.

AAHOA on the Hill

The program’s expiration came as a major disappointment to the hospitality community. AAHOA members across the country, who had once utilized the debt-refinancing option to expand their businesses, were now left with decreased access to capital and a destabilized economic outlook.

But the AAHOA community was resilient. At the start of the 2013 legislative session, the association’s leaders met in Washington, D.C., tenaciously driven to reinstate the program by enacting federal legislation. If they could reinstate this essential program, even just for a few years, legislators would truly understand its importance for small business owners and support its renewal for years to come. At least, they hoped…

However, as with any legislative issue, politicians do not always understand the everyday challenges that hoteliers face. Likewise, they are not always receptive to the demands of the industry’s advocates. To be successful under a federal government that currently enacts less than 1.5 percent of all proposed bills into law, AAHOA needed a comprehensive advocacy strategy with widespread support. Further, this mission required sufficient time, energy and resources to forge relationships with members of Congress who understand small-business issues.

Congresswoman Judy Chu (D-CA-32)

In the winter of 2013, AAHOA’s advocacy leaders met with several members of Congress to explain the importance of the 504 Loan Program. In this pursuit, they found one individual to be particularly responsive to the plight of America’s small business owners. Congresswoman Judy Chu, the representative of California’s 32nd district, emerged as AAHOA’s champion on this issue.

On March 18, 2013, Representative Chu introduced the Commercial Real Estate and Economic Development Act (CREED Act) of 2013. This bill aimed to reinstate the SBA 504 Loan Program, restoring and reviving the original provisions included in the Small Business Jobs Act of 2010. That same year, Senator Mary Landrieu (D-LA) introduced the CREED Act in the Senate.

Together, in coordination with industry partners such as the National Association of Development Companies (NADCO), AAHOA members stormed Capitol Hill, projecting a united voice as the nation’s leading hotel-owners association.

In both 2013 and 2014, during the U.S. Congress’ 113th session, AAHOA members met with legislators and staff to talk about the loan program at AAHOA’s Fall National Advocacy and Spring National Advocacy conferences. They discussed the CREED Act at monthly small delegation meetings and regional conferences. They wrote letters to legislators on behalf of the association, as well as testified at congressional hearings in support of the initiative. All the while, Congresswoman Chu vehemently sought support from her colleagues to co-sponsor her bill.

(L to R) AAHOA Director at Large Vipul Dayal, Congresswoman Judy Chu, AAHOA Regional Director Timesh Patel, Neal Bhakta, Past Chairman Tarun Patel and Neal Patel.

(L to R) AAHOA Director at Large Vipul Dayal, Congresswoman Judy Chu, AAHOA Regional Director Timesh Patel, Neal Bhakta, Past Chairman Tarun Patel and Neal Patel.

When the bill did not move in 2014, AAHOA members, industry advocates and pro-small business elected officials continued to persevere. In 2015, the CREED Act was reintroduced in the House of Representatives by Congresswoman Judy Chu, and was proposed in the Senate by Senator Jeanne Shaheen (D-NH).

 

The Final Stretch

On Friday, December 18, 2015, Congress passed a $1.1 trillion end-of-year spending bill, otherwise known as the Omnibus Appropriations Bill. Due to the leadership of Congresswoman Chu and small business advocates nationwide, this legislation used language from the CREED Act to permanently renew the SBA 504 Program.

Beginning in summer 2016, nearly four years after the program’s expiration, AAHOA members will once again have access to sufficient resources to grow their businesses and protect jobs.

“Reauthorizing this vital program gives American hoteliers the necessary capital, resources and economic certainty to compete,” said AAHOA President and CEO Chip Rogers. “As influential community leaders, AAHOA members will continue to coalesce around legislative initiatives that improve the hospitality industry and encourage small business growth.”

Brian Kaissi is the Government Affairs Coordinator for the Asian American Hotel Owners Association (AAHOA) and can be reached at brian@aahoa.com.

How do CDC/504 loans work?

The 504 Debt Refinancing Program allows small business owners to finance up to 90 percent of the current appraised property value, plus 504-eligible refinancing costs without requiring business expansion.

    Usage of 504 loans

504 loans, otherwise known as Certified Development Company (CDC)/504 loans, can be used to refinance fixed assets, such as the purchasing of land, the construction or modernizing of facilities, the purchase of improvements, and the purchase of long-term machinery and equipment. These loans cannot be used for working capital, inventory or investment in rental real estate.

    The numbers

The maximum SBA debenture is $5 million, and a business must create or retain one job for every $65,000 provided by the SBA. Interest rates on 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. Fees total approximately 3 percent of the debenture and may be financed with the loan.

    Eligibility and requirements

To be eligible for a CDC/504 loan, applicants must file an extensive SBA Loan application to their local CDC (CDCs are non-profit corporations certified and regulated by the SBA to provide financing to small businesses). There are 270 CDCs nationwide, each representing a specific geographic region.4 These applications require business owners to document both their personal background and business financial statements, as well as several other records to prove their loan eligibility.

  • For more information, please visit www.sba.gov.

 

 

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