RV Park Financing is readily available from conventional and SBA lenders for both the purchase of an existing RV park (or campground) or the development of one.
More real estate investors and/or would be business owners are discovering that RV resorts, RV camping, campgrounds, motorcoach resorts, motorhome parks, glamping resorts, glampgrounds and RV parks can be a good investment and that financing is available.
RV Park Financing – Conventional Loans
Conventional loans (a loan NOT backed by a government guarantee) usually require 25% down and borrowers with solid financials, relevant experience and very good credit are able to get very good terms on loans between $1 million and $20 million+.
There are lenders and banks that specialize in conventional RV park loans and some are quite reasonable with regard to the terms they offer as well as the reasonableness of their underwriting requirements.
Please contact us if you have questions about qualifying for a conventional loan and/or possible terms.
SBA RV Park Loans
SBA RV Park loans are typically for those who would rather put less down, do not have a large down payment/significant equity or have little or no experience in the industry, or perhaps don’t have all the right qualifications for conventional financing.
SBA RV Park financing is (oddly) still an immature lending sector and experienced SBA lenders that finance RV parks can be difficult to find. Most lenders would rather finance something they have more experience with and most have never financed an RV Park.
The obvious reason is that most RV parks typically have a lot of land and many are rural in nature and most lenders like to finance buildings on smaller lots in urban or suburban areas which are more likely to be in a bank’s lending area.
Also, should a borrower default on a loan it is usually quicker and easier to sell a building in a major metropolitan area than it is to sell an RV park that might be rural.
The positive news for those looking for financing is that there are SBA lenders who have no problem doing good loans whether it is rural or not.
Low Down Payment RV Park Financing
Low down payment RV park financing is available for both the purchase of an RV park and for ground up construction (purchase of land or existing property plus construction) from the more expert SBA lenders if you have the following attributes:
- Good credit
- At least 5% or 10% down
- Relevant work experience/management abilities
No Down Payment (technically possible)
In fact, very experienced RV park owners can occassionally purchase an RV Park with no down payment using the SBA 7a loan (assuming you have enough SBA eligibility). Only certain lenders will allow this, and you will need to already own a few cash flowing parks, but it is possible.
More frequently, we see situations where borrowers are using the other allowable means of coming up with the traditional 10% down payment as detailed towards the bottom of this page.
Owner Occupied Business Property
SBA loans are “owner occupied business loans” made by lenders and banks where the lender gets a partial “guarantee” from the U.S. Small Business Administration. “Owner occupied” in the case of SBA financing means that the operating business (the RV park/resort) covers (or “occupies”) the majority of the square footage of the property and that the owners of the business either run it or are involved “enough.”
The SBA Guaranty is similar to a “mortgage insurance” policy that gives the lender additional security when making a loan which allows them to approve loans they wouldn’t normally approve due to factors like a high loan to value, a borrower’s lack of direct industry experience, past credit issues or a lack of reserves/post-closing liquidity.
The amount that is guaranteed by the SBA depends on the type of loan, but in the case of an RV Park it would typically be between 30% and 75% depending on which type of SBA loan you are applying for and the amount of financing provided by a bank or lender.
SBA 7a Loan
The SBA 7a loan comes with a 75% guarantee from the federal government for the lender and is a very versatile program that allows lenders to finance “any legitimate business purpose” including the purchase of a business, the start up of a new business (including ground up construction loans up to $5 million+*) or the refinance and/or recapitalization of a business.
Funds are also available to purchase and expand an RV park or to refinance and expand a park.
The 7a allows lenders to offer RV park financing for campgrounds and parks with as little as 10% down or even 5% down in the case of an acquisition where the current owner/seller is willing to hold a second mortgage on full standby. (“Full Standby” means you are not supposed to make payments on the seller-provided secondary financing for as long as you have the SBA loan).
See below under “down payment requirements” for additional info re: the acceptable sources of down payment/equity injection as they can be quite flexible, including the ability to borrow the down payment.
Liquidity and Loan Size
SBA RV park lenders are able to offer such low down payments due to the aforementioned SBA guaranty, but lenders still want to see that prospective applicants have enough strengths to give them confidence the loan will be paid back. (i.e. they will not approve a loan for someone who does not have what they consider to be enough liquidity or cash in the bank after closing).
Also, it can be difficult to get a lender to do what they consider to be a smaller loan. Smaller in this case, is under $1 million, but there are lenders who will offer loans as small as $500,000.
*FYI: There are also a few lenders who will occassionally allow transactions up to $10 million with the SBA 7a with just a 10% to 15% down payment/equity by offering a unusual 2 loan structure, but those transactions/borrowers have to be extraordinarily strong and will usually need to pledge additional collateral/equity in other property to qualify.
RV Park Construction Loan vs. Acquisition
For most types of businesses, it is generally easier to get an SBA loan for an existing business with solid historical cash flow than it is for a startup, but when it comes to applying for an SBA loan for an RV Park or campground this isn’t necessarily the case, as an SBA loan for new construction is possible if you have the following:
- a solid business plan
- realistic projections
- solid assumptions for those projections
- possibly a comprehensive feasibility study
- capable management
- a large enough loan request
- enough post-closing liquidity
Finance the First 2 Years of Payments
The more experienced lenders will base the approval for an RV park construction loan entirely on the merits of the borrower, the business plan and projections and the feasibility study (if needed), and they will finance everything they can into the loan including all construction interest, closing costs, the SBA loan fee. And, they will include working capital to help cover payments while you ramp up the business. Experienced RV Park owners may be able to get enough working capital added to the loan to cover the first 2 years of payments.
The ability to finance so much of the usual costs and fees makes this a very attractive scenario for a borrower as it really limits your total out of pocket costs and having the ability to finance the first 1 to 2 years of mortgage payments while you are ramping up the business is very unusual for most types of construction financing, however there are a few SBA lenders that will do just that if they feel the transaction in strong enough.
Short Prepayment Penalty Is a Bonus
Another benefit of the 7a which is important to mention is that it only has a 3 year prepayment penalty.
A prepayment penalty is something lenders like to have on almost all commercial loans, because it protects them from early payoff of the loan. (Lenders like for borrowers to keep their loans long enough for the lender to make a decent profit).
The SBA 7a program only has a 3 year prepayment penalty and SBA lenders cannot change the terms of it, which is a bonus for borrowers. (Keep in mind that you are allowed to pay down 25% of the principal in each of the first 3 years without triggering the penalty).
The penalty is 5% is year one, 3% in year two and 1% in year three and the reason this is attractive to borrowers financing RV parks (especially new construction), is because it gives them options to refinance or sell the property in the near term with limited to no penalty. i.e. a 1% penalty just two years after closing/breaking ground or no penalty at all three years from closing.
Why is this important?
If you have built the park in the right area and marketed and managed it effectively, then you should have high occupancy and good cash flow (which naturally leads to more equity) at around the time the prepayment penalty is either 1% or nothing.
The larger amount of equity (or lower loan to value), makes it easier to refinance should you need to, and this is an important point as at the time of this writing – June 2022 – we may be tipping into a recession and the Prime Rate is poised to go up some more – and almost all of these types of SBA loans are based on the Prime Rate.
The short prepayment penalty also allows you to also sell the property with little or no penalty in 2 or 3 years if the right offer comes along. Which brings us to a discussion of interest rate and terms for these loans…
RV Park Loan Rates
The most active and flexible SBA RV Park lenders tend to offer floating rate or adjustable rate loans – especially for construction projects – or 3 to 5 year fixed rates that are fully amortized over 25 years with no balloon.
The payments that get financed into the loan during construction are “interest only,” and in some cases, some lenders will allow for an additional interest only period that extends the loan to 26 or more years.
Loan pricing can really vary from lender to lender based on the lender’s source of funds, their business model (whether they put loans on their balance sheet or sell them on the secondary market), and the perceived risk of the transaction based on the borrower’s credit profile, experience, down payment/equity, business plan, projections, etc.
Many of the most flexible and active lenders will price loans at a high margin over the Prime Rate (2 to 2.75% over Prime) – especially for highly leveraged, marginal or smaller transactions – but there are lenders who will price loans for stronger transactions at a more reasonable Prime + 1%, which is not a bad deal in any market (even the current one), especially if you believe that any coming recession will be short-lived as it is possible that rates could go up and come back down.
RV Park Construction to Permanent Financing
This type of SBA loan is essentially a very secure construction-to-permanent loan that benefits both the borrower and the lender as it allows you to finance the acquisition of the land, the complete construction of the project and any other additional costs.
Primary Borrower Benefits:
- Finance acquisition of the land
- Finance all construction, construction costs. equipment and working capital
- Finance all loan fees and closing costs
- Finance up to the first 2 years of payments
- 5% to 10% down up to $5 million (sometimes more)
- 25 year fully amortized loan with additional interest only period on front end of loan
- Allows them to make larger, more secure loans
- Allows them to offer larger loans than they could conventionally since the SBA-guaranteed portion of the loan does not count against the lender’s legal lending limit
- The SBA Guaranty goes into effect on the day of closing with a 7a loan, which means the lender is “protected” during construction and before the park is open for business. This greatly reduces the risk for the lender while there is no cash flow from the business
- Capital and “loan loss reserves” are lower on SBA loans than conventional bank loans
- In most years, the bank has the option of selling the SBA Guaranty in the secondary market and making significant premiums within days of closing the loan
RV Parks – SBA Eligibility
The primary characteristic for an RV Park to be SBA eligible – whether you are looking to finance a start up or an existing RV park – is more than half of the income (or projected income) must come from visitors who stay for 30 days or less.
This is true whether you are financing new construction or seeking an SBA loan for an existing park.
The rule is that more than 50% of income must come from “short term stays,” so the key characteristic for a park to be SBA-eligible is that the park must be one that is set up to (mostly) accomodate vacationers. (Some lenders interpret this to mean that “seasonal” visitors on month to month leases are okay, but this is case by case and lender by lender).
Admittedly, this “short term stay” rule is unusual, but the reason behind it is that SBA loans are not meant for “passive” businesses. They are meant for businesses where the owner is involved in the operation and success of the businesss vs. something like a true investment property and the SBA makes that distinction in the case of RV parks by reasoning that if more than 50% of the income generated by the park is coming from short term visitors vs. long term tenants and the owner/borrower is involved “enough” in the business, then the loan is less of an investment property vs. owner-occupied business property and therefore eligible.
(Please contact us at 1-800-414-5285 if you have questions about this as this can be a little confusing).
SBA guidelines require that the owner/borrower/guarantor be hands-on “enough,” but again, this is a bit of gray area and somewhat deteremined by the SBA lender evaluating the transaction.
Part of the reason this is gray is that there are 2 types of SBA lenders – those who have the ability to underwrite, close and fund the loans themselves with no SBA involvment and those who need to rely on an actual SBA underwriter to formally approve the loan for them.
The lenders who do not have to rely on SBA have far more experience with the program and will typically make executive decisions on files that the less experienced lenders are unable to make. i.e. these lenders will approve more loans that do not perfectly fit the SBA’s RV park financing guidelines.
In an ideal world, most lenders would like for the owner to be the manager, but it is perfectly acceptable to have an on-site employee who runs the park as long as the owner/borrower is involved enough to satisfy the lender. Usually, this means that they are regularly visiting the property as well as having ultimate authority over hiring and firing of employees, bank account access, etc.
In some instances, we have seen transactions where a lender couldn’t quite get comfortable enough with an application due to lack of experience for the borrower or the distance an owner lives from a property until the owner gave a small percentage of ownership to the on-site manager. The reasoning is that if the owner is not local, they want the manager to be incentivized to do a good job and really care are about the property. (Usually, just 2% to 5% ownership is enough).
Third Party Management Companies
Third party management companies are also allowed to manage a park or resort as long as their management agreement does not give them too much control over the business.
To be approved, it is critical that the business (or projected business if new construction) has good cash flow – typically defined as “debt service coverage” of 1.25 or better – which means the “net income after addbacks for interest, depreciation, one-time expenses, etc.” must be approx 1.25 times the mortgage payments for the year (including taxes and insurance).
Startups require at least 10% down for loans up to $5 million but if you are buying an existing RV Park with strong cash flow and as mentioned above, if the seller is willing to hold a second mortgage on “full standby” (no payments to be made to the seller for as long as you have the SBA loan) then it is permissable for you to make a down payment of just 5%, however, some of the more conservative SBA RV Park lenders may not allow this as it does increase the risk.
In fact, there are lenders who require more than the minimum down payment required by SBA.
SBA Credit and Credit Score Requirements
There is no minimum credit score for an SBA Loan of more the $350,000, however many SBA lenders will require a minimum score and it is usually in the low to mid 600’s.
This is not so much a disconnect between what the SBA requires and what lender’s want, so much as it is just common sense for a lender to have certain credit standards across all loan products.
The SBA allows lenders to make their own credit decisions on loans, because they realize that some borrowers will have unfairly low credit scores for various reasons. And by allowing the lender to make a judgement call as to what they consider acceptable credit, the SBA is helping more borrowers realize the benefits of the program.
Bear in mind, you definitely need good credit. No lender is going to make a loan (especially a high loan to value loan) to a borrower who has mismanaged their credit over the years.
So what is “good credit?”
Each lender has their own guidelines re: credit and what they consider to be acceptable.
Generally speaking “good enough” credit means good (or very good) credit for the most recent few years. Some SBA lenders are quite flexible about approving borrowers with past bad credit, but it really depends on your explanation of the events that lead to the bad credit, how long ago the negative items occurred and whether or not they were isolated to a particular point in time vs. a long term pattern.
The occasional late payment is generally not a problem and some lenders will disregard minor medical collections depending on the circumstances. Even borrowers with past bankruptcies are eligible if enough time has passed since the discharge, the explanation is satisfactory to the lender and there were no losses for the federal government.
If you have a past BK you can learn more about how lender’s will consider your loan request on our blog: SBA loan with a bankruptcy.
Also, it is important to understand that the more flexible a lender is with regard to credit, down payment, net worth and post-closing liquidity, the worse the terms will be that they offer, but again, if you get “stuck” with less than great terms, the short prepayment penalty could provide a quick exit strategy.
Down Payment Requirements
The SBA is also flexible on the source of your down payment.
You need to have enough of your own cash in the transaction to get an RV park lender comfortable, but the SBA rule re: the source of your (cash) down payment is flexible and can include the following sources:
- money that is borrowed
- money from “investors”
- gift funds
- some retirement account rollovers, which can be tax and penalty free.
- seller-held seconds
Re: all of the above:
- For money that is borrowed, you are allowed to borrow all or part of the required down payment if you or your spouse have stable income from another source that allows you to easily afford the payments on the borrowed money. In fact, it is close to an absolute requirement for most lenders that any borrower/guarantor have enough (and stable enough) income from some other source to even be considered for a loan even if you are not borrowing money towards your down payment. The exception to this might be someone with “significant enough” liquid assets. Again, like so many things with SBA RV Park financing, this is a judgement call for lenders.
- “Investor” money is usually money invested by friends or family in exchange for a small percentage of ownership in the business.
- Gifts are allowed, but again, you will likely need some of your own cash in the transaction for a lender to feel like you have enough skin in the game.”
- Certain types of retirement accounts can be “rolled over” tax and penalty-free. Usually, it needs to be a retirement account from a former employer or some type of IRA, but you can rollover the portion of an account from a current employer that originated with a former employer. (Please contact us re: how this works as the rules are very specific).
- As noted abovc, seller held seconds need to be on full standby for the life of the loan, but they can account for up to half of the requirement down payment.
How to Finance an RV Park with No Money Down (sort of)
Can you really finance an RV Park or Campground with no down payment using an SBA loan? The answer: Yes and No.
Depending on the loan size, the program (7a or 504) and the use of proceeds (aquisition vs ground up, etc.), you can get up to 90% financing from an SBA lender and you can use one or more of the options above for the other 10% – effectively creating “100% financing.”
The more solid you are as a borrower the better the odds of being able to avail yourself of one of these options and actually getting approved, and if borrowing the money, it could be difficult to find a source to borrow a large amount from, but it is possible.
This is easier to accomplish with smaller transactions of between $500,000 and $5 million where borrowers have stable outside income (that will continue post-closing) and enough other strengths to get a lender comfortable.
Also, there is nothing in the SBA rules that says you cannot combine some or all of the ways to come up with the down payment, as it is up to a lender to decide if a transaction is too risky.
Obviously if you are buying someone else’s RV park and the seller is willing to hold half the down payment in the form of a second mortgage on standby then you will be a lot closer to your goal.
A business loan to purchase an RV park is only SBA-eligible if the seller’s tax returns and documentation show more than 50% of the parks revenues were from “short term stays” of 30 days or less. In fact, some lenders are okay if just the most recent tax return shows this.
In the case of a construction loan to build or expand an rv park your business plan and projections need to show more than 50% of the revenues will come from short term stays.
Green RV Park Loans
It is also worth noting that the 504 program can be used to increase your SBA eligibility if you “go green.” In fact, going green by producing enough of your own energy using either solar, wind, geothermal, biomass or hydropower, dramatically expands how many parks you can finance with the higher leverage that SBA loans allow.
The current rules state that if you produce more than 15% of the power needed by the business, you can have up to $16.5 million in SBA loans at one time. Also, the maximum 504 second mortgage is $5.5 million for the Green 504 loan vs. just $5 million for regular 504 loans.
This number is deceiving however, because with the 504 program, only the 2nd mortgage which is used to finance 30% to 40% of the total project, is SBA guaranteed, so this can equate to $30 to $40 million in total financing depending on whether you put down 10%, 15% or 20%.
You can also put down just 10% with some lenders under the SBA’s expansion guidelines, meaning that if you are already a successful operator of at least 1 RV park, you might be able to put down just 10% on the next one using the 504.
SBA Loan Fees
The SBA charges a fee for all 7a loans – the SBA Loan Guaranty Fee – and it is not cheap as it is roughly 2.75% of the amount of the financing, but it is rolled into the loan and rarely are there any points or origination fees with these loans, so while the fee makes the loan more expensive, the other benefits of the program (low down payment, more flexible underwriting, etc.) and the fact that the fee is financed into the loan make it worthwhile for borrowers.
And while the SBA Guaranty is similar to mortgage insurance, there is no monthly amount added to your payment. It is simply a one-time (financed) cost.
SBA RV Park Financing Benefits Summary
To summarize: many non-SBA RV park lenders will require 25% to 30% down, direct industry experience, significant liquidity, net worth and reserves.
SBA lenders operate at the opposite end of the this spectrum and are able to do so because the SBA is guaranteeing (effectively insuring) a substantial enough percentage of the loan allowing the lender to take more risk.
The program provides a solution for borrowers who cannot qualify for conventional financing, but it is also very useful for experienced RV park owners growing or expanding their businesses who are looking for higher leverage RV park financing and/or the ability to finance as much of the costs as possible into the loan.
A Note About USDA Loans and SBA 504 Loans for RV Parks
Most RV parks are in rural areas and one significantly overlooked type of RV park financing is a USDA loan. They can be an excellent choice although unlike SBA loans you must have at least 20% down.
USDA loans also can take quite a bit longer to close, but they are also amortized over a full 30 years (and are more likely to be a 5, 7 or 10 year fixed rate at a decent rate).
504 loans can be a great way to get long term fixed rate financing and/or a way to get more SBA eligibility due to the Green 504 program.
The Green 504 allows borrowers to finance renewable energy technologies into the loan while simultaneously increasing the borrower’s SBA eligibility. It definitley a less flexible loan, but it can be very useful for those financing larger projects or who need more eligibility. You can read about it here.