Most of us in the lodging business today have seen hotels, motels, and B&Bs default on their mortgages due to the decline in their gross room income. About 90 percent of those properties going into default have an SBA loan, either an SBA 7a loan or a 504 loan. What makes the situation worse for these owners is that they do not know how to handle the problems with the SBA lenders. The most important thing for the owners to keep in mind is that the SBA is there to help them.
Even if you think you do not currently have any equity in your property, the SBA has many workout programs that may allow partial deferral of your payments for one year, which will allow time for the market to adjust. Then the obligor will make up that deferral within a five year time frame. If the owners want to “throw in the towel” and sell the property, but there is not enough equity left to pay off all of the loans, then the SBA will also try to develop a workable plan for you. An owner can sell the property and work out an arrangement with the existing lender for a settlement price and then make a settlement with SBA after closing.
Almost all SBA loans on lodging properties are made to operating companies, limited partnerships, or limited liability companies and are personally guaranteed by the individuals who are in control of the investment and the managing entity. When an owner settles with the SBA for the release of the SBA loan in order to complete a “short sale” of the property, that individual (or individuals), and all personal guarantors are still responsible for the remaining balance of the SBA loan.
Therefore, even though the lien from the SBA loan is released from the property so the owner can complete a sale of the property in default and close the escrow, the owners must still deal with the SBA loan. To cross this next hurdle one must submit an OIC (offer in compromise) to SBA to pay off all or a portion of that outstanding loan balance. The OIC forms are independent to each obligor and must include the current financial information including a current personal financial statement.
SBA will take into account such things as a person's current earnings and the projection for future earnings along with the person's age (if they are young, they have the chance to earn more income over the future years, yet they may have several more dependents) and work experience. With that OIC, the borrower must make a valid offer to SBA with an amount they are capable of paying toward the outstanding loan balance and a plan to pay that amount off, with a one time payment or monthly installments.
After submitting the OIC, SBA will assign a loan workout specialist to review the situation and then SBA will come back to the guarantor with either an acceptance of the OIC amount and terms or a counter offer outlining what they would like to see as payoff terms. Through negotiations with SBA, the guarantor and SBA will arrive at a settlement amount and terms. SBA may accept monthly payments and possibly utilize the cost of money interest rate. The SBA may also spread the payments out over five to 10 years, or make other arrangements.
Howard Mathews and Brian Mathews of National Hotel Motel Brokers have handled more than a dozen workout situations for lodging properties in default. They have assisted owners with sales and workouts of a variety of loan guarantees to reach mutually beneficial agreements. Howard can be reached at 925-634-2299 or howard@nhmb.com; Brian, 925-418-8226 or brian@nhmb.com.