That big 400-room, full-service Marriott Hotel is going to be a tough deal to finance this year. The 300-room Ritz-Carlton won't be any easier. But hotels will still get started in coming months.

They're likely to be the 100-room roadside inns where the closest dining room is the Denny's down the street and the manager doubles as housekeeper. To keep this species of lodging alive, the U.S. Small Business Administration (SBA) will be playing a central financing role.

It's no secret that hotel lenders have turned cautious, but with the SBA willing to guarantee 30% to 40% of the loans on smaller assets, banks and other institutions will be emboldened to stay in the game.

Entrepreneurs considering new construction or acquisition of an older property are likely to view the SBA as a critical lifeline in coming months. The numbers are compelling: Whereas conventional lenders right now are asking developers to put at least 35% to 40% of their own money toward a new hotel property, the SBA's relaxed standards require just 20% owner equity. The gap between the two often makes the difference between a deal getting completed or sinking into oblivion.

“I'm a huge supporter of the SBA right now,” says Reginald Heard, president and CEO of Bankers One Capital in Danbury, Conn., a mortgage broker and lender. “A lot of lenders have put a moratorium on hotel development. But the SBA is still making loans even to first-time hotel operators. I did eight SBA hotel deals last year, and I expect to double that in 2009. The agency will be very important to the marketplace.”

It's become a rock of support for aspiring innkeepers like Rick Bessie, president and owner of investment firm Winslow Group Inc. in Dallas. At 65, Bessie has been a hotel broker much of his life. But with brokerage volume slowed to a crawl, he now hopes to build his first hotel from the ground up. He's applying for an SBA loan and admits that without government money his vision would turn dark.

Bessie has a 2.2-acre site in a small town in east Texas that he declines to name, and plans to put up an 83-room Fairfield Inn & Suites. The cost will come to $6.7 million, typical for such a hotel in a small town. Bessie has enough for a 20% down payment, but not enough for the 40% that his Texas bank would require in a conventional loan arrangement.

“My personal financial statement isn't strong enough to get a conventional loan,” Bessie says. In his scenario, the bank expects to lend half the cost of construction conventionally. Another 30% will be guaranteed by the SBA. Bessie will kick in his 20%. “The bank's exposure is just 50% on a deal like this,” Bessie observes. “So its risk is quite limited. The SBA participation gives the bank great confidence to move ahead.”

The SBA also will lower Bessie's costs. His first loan will be priced close to a 7% interest rate, he figures. But the SBA-guaranteed loan for the other 30% will be priced at 4.5%. Bessie's pro forma calls for 60% occupancy of his new hotel in the first year after it opens in 2010. With the discounted SBA loan's help, his break-even point will be just 52% occupancy. Without the loan discount, break-even would rise to around 57% occupancy, he says, leaving little margin for error in the first year.

“The SBA is absolutely essential in this deal,” Bessie says. “Without it, the project wouldn't get done.”

Big plans for Boise

Hement Khatri has owned an SBA-financed Comfort Inn of 80 rooms in Modesto, Calif. since 2001 together with his brother Suresh Chandra. Recently they acquired a three-acre site in Boise, Idaho, with plans to erect a La Quinta Inn & Suites there for about $8 million.

The SBA caps its loans at $2 million to any individual or partnership, and Khatri and his brother still owe the agency $700,000 on their Comfort Inn. They are close to a deal to borrow a crucial $1.3 million to help complete the La Quinta financing. Mountain West Bank will provide the conventional financing, and the brothers will invest $2.5 million of their own money.