“Hotel financing gets held up for all sorts of reasons these days,” says Khatri, age 50. “In our case the bank asked us for an additional $500,000 in an escrow account in case our construction costs go over budget. That would be a deal-killer without the SBA help.”

Is there much downside risk? Khatri's hotel site is across the street from the Boise regional airport. There are other hotels in the area, but no other La Quintas. “It's one of the very fastest growing chains anywhere right now,” says Khatri. “Its popularity is what gives us confidence.”

Loan volume shrinks

Confidence is in short supply in the hotel industry of late. Even with its important role in the absence of regular bank lending, SBA hotel loan volume has dropped. In the fiscal year ended last Sept. 30, the SBA guaranteed 1,830 loans, down 15% from the 2,163 issued in fiscal 2007. The dollar volume was down 11% to $1.9 billion (see chart).

In the current fiscal year, SBA hotel loan volume so far is down 40% from levels a year ago. “People think our lending ought to be up because so many banks have stopped making loans,” says Grady Hedgespeth, director of the SBA office of financial assistance in Washington, D.C.

“But we can't overcome the broader dynamics in the economy. Demand from borrowers of all kinds has fallen a lot recently.” He adds that the applicants he does see are often less creditworthy than they were 12 months ago. The chief reason: the equity in their own homes has declined. “A person's ability to borrow is tied pretty closely to the equity in their home in many cases,” according to Hedgespeth.

Although the number of SBA loans dropped from 2007 to 2008, the value of the agency's loans has risen from $540 million in 2000 to $1.9 billion last year.

SBA lending has a checkered past, but Hedgespeth insists that most of the hotel program's old failings have been fixed. In some years, the SBA simply ran out of money and stopped lending. About five years ago Congress made the programs self-supporting, with various fees providing needed capital and no direct subsidy from government coffers necessary. So there is now plenty of money to lend.

Like a speeding bullet

The biggest complaint for a long time was the SBA's slow pace in loan review. Underwriting was spread across 68 district offices and maddeningly inconsistent, too. Beginning two years ago under Hedgespeth, new computer technology was added to make applications paperless, and much of the loan process was consolidated to a central office near Sacramento, Calif.

The results are positive. “We do 90% of our approvals in five days or less now,” Hedgespeth says. “When I travel around the country lenders invariably want to thank me for the huge improvement we've made in the approval process.”

Still, not every hotel broker is sold on the SBA. Joseph Epstein, president and owner of First American Realty Associates LLC in Fairfield, N.J., believes that banks' retreat from the hotel market has been oversold by the media.

Banks are still lending, he asserts, and in fact the market remains stronger than it was in the depths of the savings-and-loan crisis of 1990. “In 1990, there were 747 banks that had gone under. Today only 25 have failed and another 200 are on the watch list,” Epstein says. “Lenders today are still listening to borrowers and they're still making loans.”

Epstein observes that the SBA's central role today is in bootstrapping first-time borrowers in the hotel industry. “A conventional loan to a first-time developer is almost impossible to arrange right now,” Epstein admits. “The SBA is a great place to get started.”