Decisions, decisions, decisions


Is it time to refinance your SBA 7(A) loan with an SBA 504 loan?


Many hoteliers have taken advantage of the SBA 7(a) loan program to finance a new development or acquisition + PIP. There are many benefits to 7(a) loans, including low down payments, no technical default, short prepayment penalties, reasonable interest rates, etc.

If there is a downside to 7(a) loans, it’s that they’re usually floating-rate loans pegged to the Wall Street Journal prime rate. The prime rate is set by banks to convey what banks charge their most creditworthy customers. SBA lenders generally charge a “spread” over the prime rate ranging from 1.25% to 2.75%. When the pandemic hit in March 2020, the Federal Reserve Board swiftly lowered the Federal funds rate to its minimum, and the prime rate followed suit. As a result, prime was 3.25% for a full two years.

As expected, the Fed increased the funds rate by 0.25% at its most recent meeting on March 16, 2022, and prime followed suit by increasing 0.25% to 3.50%. While there are myriad economic and geopolitical factors that may cause the Fed to shift course, at present the expectation is that the Fed will increase The Fed funds rate (and therefore prime) by as much as 1.50% the next 12 months.

Up until 2021, options for refinancing 7(a) loans secured by hotel properties generally were limited to conventional loans and CMBS loans, both of which come with challenges. Fortunately, a new and very powerful solution emerged in July 2021 when the SBA authorized lenders like LendingClub Bank to use 504 loans to refinance existing 7(a) loans.

SBA 7(A) loans are simply loans from a bank, credit union, or finance company where the government provides a guaranty to the financial institution on the loan. Typically, the guaranty is for 75%. As you might expect, this guaranty allows lenders to make loans they wouldn’t make but for the guaranty.

The 504 program, however, marries a loan from a financial institution with what’s called a “debenture loan,” which is a fully amortizing, fixedrate loan that does not balloon. What’s more, the rates on debenture loans are subsidized by a government guaranty, so they feature interest rates significantly below market. Additionally, while using the 504 program to fix your rate for up to 25 years, you can also increase your loan amount to borrow funds for line items like salaries, utilities, real estate taxes, and other operating expenses.

Let’s review an example of this to see the power of this opportunity. Suppose three years ago you used a $5 million 7(a) loan to finance a hotel purchase for $5 million and then complete a PIP of $1 million. At the time, the property was in dire need of a PIP and was poorly managed. Due to your management and diligent completion of the PIP, RevPAR has grown dramatically, and the asset is now producing $600,000 per year in NOI, meaning it’s worth roughly $7.25 million (using an 8% cap rate). Your lender made you a loan at prime + 2.25%, so your current interest rate is 5.75% (expected to be 7%+ by the end of 2022), and your loan balance is ∼ $4.7 million.

Assuming an interest rate of 4.50% on the senior bank loan, your blended interest rate (combined interest rate on the bank loan and debenture) using the March 2022 504 25-year debenture rate of 3.93% would be 4.29%. Further, you’d be locking in the interest rate on the debenture portion of your loan for a full 25 years, and as much as 10 years on the bank loan. In this hypothetical scenario, assuming six additional Fed rate hikes in 2022 of 0.25%, you will have lowered your rate by approximately 300 bps and financed $450,000 for future operating expenses.

This is a very powerful opportunity and one you should discuss with a bank that is adept at guiding you through the 504 program. There is significant upward pressure on rates right now. So, all else equal, the sooner you refinance, the lower your rate is likely to be.

Mac Dobson is a Senior Business Development Officer with LendingClub Bank’s Government Guaranteed Lending team (“GGL”). He delivers the full suite of government guaranteed loan products to businesses including SBA 7A, SBA 504, and USDA. He can be reached at or (734) 604-6962.


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