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USDA Disqualifies Hotels with Pools

 

On July 24th, USDA issued a Notice pursuant to the recent passing of the American Recovery and Reinvestment Act of 2009 indicating additional funds allocated to the Agency for use under the B&I loan program. The provisions of this Notice do not apply to the loans funded under the Omnibus Act of 2009. (see the Notice – Vol. 74 No. 141 July 24, 2009)

 

The highlights of the Notice are:

 

  • The Act provides $126,100,000 additional funds through September 30, 2010 for B&I loans
  • The guarantee fee for loans funded through this program is 1% instead of the standard 2%
  • Hotels/Motels with pools are disqualified from this program
  • Applications scoring at least 55 using B&I criteria are eligible for 90% guarantee

The guarantee has three benefits for the lenders:

 

  • The lender can sell the 90% guaranteed portion to the secondary market for a premium. With regained liquidity the lender can process new loans
  • The lender is not required to hold reserves for the guaranteed portion, hence additional capital doesn’t get tied up for a loan
  • Even if the loan is kept on the books and not sold in the secondary market, the lender has reduced risk exposure when 90% of the hotel loan is guaranteed.

Hotels with pools then can only be financed through the Omnibus Bill at standard terms with 80% guarantee yet the lenders will find it unattractive to finance hotels at 80% while they can receive 90% guarantee on other types of assets. On the other hand, pools are almost a standard feature for the hotels and the franchisors now may require a pool as a necessary feature. With the USDA financing as the last resort strategy for financing hotels, the disqualification will blight this weak industry even further.

 

 


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