SBA Hotel Loans and Financing

SBA hotel lenders will finance hotels and motels for the following purposes:
  • Purchase of an existing hotel or motel
  • Hotel construction and re-construction
  • Refinance or refinance and expansion
  • Hotel renovation
  • PIP financing
 

There are 2 types of SBA Hotel Loans

  1. SBA 7a
  2. SBA 504
SBA hotel lenders do a lot more 7a loans than they do 504.
 
There a few main reasons for this:
  1. They get a higher “guarantee” from the SBA.
  2. Most really active SBA hotel lenders can approve it in-house without sending it to SBA

SBA 7a Hotel Loan Benefits

The primary benefits of the 7a are:
  1. You can put less down – in some cases, only 10%
  2. Because of the SBA “insurance” and the profitability of the loans, lenders are willing to be more flexible in underwriting with regard to experience, cash flow, credit quality, quality of the property, etc.
  3. It can be refinanced after just 2 years with a 1% prepayment penalty or 3 years with no penalty
  4. It can be used for any legitimate business purpose – for instance, buying out partners, working capital, property improvements, debt consolidation, etc.
  5. It is fully amortized over 25 years with no balloon
The 7a is frequently a better choice for the following types of borrowers:
  1. First time hotel or motel owners
  2. Borrowers with imperfect past credit
  3. Borrowers who lack an ideal amount of experience
  4. Turnarounds/projections-based transactions
  5. Borrowers with less than 20% down
  6. Non-franchised properties
  7. Those who do not expect to own the property long term
The primary limitations of the 7a program for hotel financing are as follows:
  1. It is usually a floating rate, but some lenders offer 3 and 5 year fixed rates for stronger transactions
  2. The max loan is typically limited to $5 million

SBA 504 Hotel Loan Benefits

  1. The SBA 504 is typically the better choice for most hotel loans, but it can be more difficult to qualify for depending on your situation.
  2. It is ideal for experienced hoteliers, hotel construction financing (especially larger construction projects between $5 million and approx $20 million), or for high loan to value refinance up to 90%.
  3. The primary benefit of the 504 is the fact that both the first mortgage and the 2nd mortgage are fixed rates – the first mortgage is usually fixed for at least 5 years and the second mortgage is fixed for 25 years. Some hotel lenders also offer a 30-year amortization on the first mortgage which can be helpful.
  4. If you use the SBA 504 Green program you can finance multiple hotels
  5. You can put down as little as 15% IF you are expanding an existing business. i.e. if you already own a hotel and you are building or buying another with the exact same ownership and entity.

USDA

USDA Business and Industry Guaranteed Loan Program

  1. Providing financing solutions across the country to business owners with maximum loan amounts up to $25 million in rural areas including cities and towns with a population less than 50,000. The USDA B&I Loan Program may provide businesses that qualify with a higher loan amount and longer repayment terms. Maximum term:
    • Up to 7 years for working capital.
    • Up to 15 years for machinery and equipment (or useful life).
    • Up to 30 years for commercial real estate (or useful life).

    Appraisals:

    • All collateral must secure the entire loan and Borrower Equity requirements must be met.
    • Bank ordered appraisal reports prepared by qualified appraisers are required on all property that will serve as collateral.

    Borrower equity required:

    • Minimum of 10% tangible balance sheet equity required for existing businesses.
    • Minimum of 20% tangible balance sheet equity required for start-up businesses.
    • Equity is calculated from GAAP compliant financial statements.
    • Feasibility studies may be required.

    Typical loan purposes include:

    • Business and industrial acquisitions, construction, conversion, repair, expansion, modernization or development costs.
    • Purchase equipment, machinery, or supplies.
    • Start-up costs and working capital.
    • Processing and marketing facilities.
    • Pollution control and abatement.

    Eligible borrower categories may include:

    • Individuals, corporations, cooperatives, partnerships and other legal entities.
    • Public or private.
    • For-profit or non-profit.

    Eligible industries may include, but are not limited to:

    • Assisted Living
    • Auto Repair
    • Franchises
    • Gas Stations
    • Hotels
    • Insurance Agents
    • Investment Advisors
    • Medical & Dental
    • Office Buildings1
    • Professional Services
    • Skilled Nursing
    • Quick Lube