PMC Commercial will be the surviving entity from the merger, tentatively set to close in the fourth quarter. The plan is to "expand our investment parameters," Andrew S. Rosemore, chairman of the REIT's board, said in a recent press release. Based on the SEC report, that means the hotels will go and proceeds deployed into a funding pool primarily for a structured loan program at variable interest rates. The companies' executive committees and boards have OK'd the merger, but shareholders have yet to cast their ballots.

To aid the restructuring, the REIT and PMC Capital plan to close a $46-million, co-securitization transaction in the second quarter. In the event that fails, PMC Commercial said it will have to increase its credit facility debt, enter into new debt agreements including hotel mortgages, which now total about $15.2 million on 11 properties, or "cease originating new loans until funds are available."

In the SEC report, the REIT indicated it is positioning itself for a loan origination volume of $40 million to $50 million this year. Its loans received were $72 million at the end of 2002. The funding pool is to be built from advances on a revolving credit facility, structured loan sale transactions and sales of the hotel properties. At the 2002 close, the SEC report said the REIT had $21.2 million available in its $49.7-million credit facility and $49,000 in cash.

While PMC has had trouble competing in the fixed-rate lending arena, that's apparently not been the case with structured loan transactions and LIBOR-based interest rates. In 2002, variable-rate loans totaled $42.1 million or 58% of loans received, a good sign that's what will be used for this year's deal making, with structured loans getting the attention since it raked in $24 million in net proceeds last year. "It is anticipated that our primary source of working capital during 2003 will again be structured loan sale transactions," PMC Commercial said in the report.

The SEC filing for PMC Commercial's operator, Arlington Hospitality Inc. of Arlington Heights, IL, also shed some light on the transaction. Arlington Hospitality appears poised to buy back at least one of the 30 hotels it sold to the REIT in 1998-99. The hotel operator holds 15-year, triple-net leases, secured through the sale/leasebacks of hotels in Georgia, Illinois, Indiana, Iowa, Michigan, Mississippi, Ohio, Tennessee, Texas and Wisconsin.

The hotels, totaling 1,344 rooms, generated a base rent of $5.45 million or 36% of the REIT's income in 2002, according to the SEC filing. The leases are good through June 2008.

PMC Capital is a direct lender of SBA and commercial real estate loans, with the bulk of its funding tied to the lodging industry. About half of its business is in Texas, Georgia and North Carolina, according to Hoovers Online. PMC Commercial, the hotel portfolio owner, primarily originates commercial real estate loans to operators in the hospitality industry. Founded in 1979, PMC Commercial has been a publicly traded company since 1983 and held REIT status since December 1993.