SBA Hotel Financing
SBA 504 or 7a financing can be used to purchase, remodel or refinance a hotel or motel and recent changes to SBA eligibility guidelines have made it possible to finance multiple properties as well as larger properties.
The 7a program allows for as little as 10% down in some cases and the 504 requires 15% to 20% depending on whether or not the loan is to expand an existing hotel business or not.
90% Loan to Value Refinance Available with the 504 Program
Either program can be used to refinance a hotel since the 504 refinance program officially came back a few years ago.
Hotels can now be refinanced at 90% loan to value with some cash out - click here for more information.
SBA Hotel Financing Guidelines
- SBA Hotel Loans under the 7a program typically max out at $5 million, but higher amounts of financing are possible with a conventional 2nd mortgage for stronger projects with stronger borrowers.
- The 504 allows total project costs upwards of $20 million.
- The SBA allows businesses with a tangible net worth up to $15 million, and net (after tax) income of up to $5 million as a result of the "Small Business Lending Bill" which increased the size limits dramatically allowing many more successful hoteliers to finance more or larger properties.
- If you are building or refinancing a hotel or motel and you have the ability to make the property 10% more energy efficient or if you can produce 10% or more of your own power (usually with solar power) then it is possible to finance mulitple hotels.
Also, if you already own a hotel or motel and you have SBA financing on that property, "going green" could increase your SBA eligibility and allow you to finance another property. For more information about energy efficiency and green energy please visit our Green 504 Loan page.
- "504 loans" actually consist of 2 loans - a first mortgage provided by a lender and a second mortgage guaranteed by the SBA. The first mortgage is typically amortized over 25 or 30 years and is usually fixed for at least 5 years at a time. The second mortgage is a 20 or 25 year fixed rate that never adjusts. The combination of the 2 loans gives you low fixed rate, high loan to value/loan to cost financing that is hard to get anywhere else.
- Hotels and Motels require a 15% down payment or equity injection under the 504 since they are considered "special use" properties by the SBA. "Special Use" means that the hotel is specifically built to be a hotel and could not easily be converted for another type of business use.
- If building a hotel and you already own the land, the land value can be used at current value for equity if owned for 2 years or more.
- Both the 7a and the 504 program also provides financing that allows you to purchase and renovate an existing hotel. So if there is an older hotel that you would like to purchase and renovate you can use either program to finance both the acquisition and any modifications to the new property...and possibly at 85% to 90% loan to cost since both programs allow you to finance closing and soft costs.
- Similarly, the 504 and the 7a loan provide financing to renovate and refinance or expand an existing hotel or motel, so if you currently own a property and it needs updating or if you need to expand it, you can use the either program to finance the renovations.
Hotel Construction Financing
Hotel Construction loans are available in 2019 for good projects for experienced hoteliers building in areas where there is demand. Lenders are funding fewer projects then in the last few years - but loans with an SBA or USDA Guaranty are easier to get done.
Recent Projects Funded
We recently assisted a client with a $15 million+ ground up construction of a Marriot branded property. This project was in an area significantly impacted by recent storms and the borrower had no previous experience in the hotel industry, but was of very high character, had excellent income from another business and had assembled an exceptional team to both build and manage the property. The financing included a $5 million 7a, a $5 million pari passu 2nd mortgage and EB-5 funds. It was complicated, but our lender was up to the task.
We also recently assisted another client with the financing of a $15 million hotel construction project that had been stalled due to lack of appropriate financing. The client had been attempting to secure attractive financing for approx 2.5 years prior to reaching out to us and only had offers that were relatively obnoxious - very high rates and giving up equity.
Larger projects requiring financing from $5 million to $50 million are also possible at 65% to 75% loan to cost with conventional (non-SBA) financing.
Please contact us for more information to see if your project will qualify: 1-800-414-5285
7a program - the 7a program can be used for a hotel refinance. The maximum loan limit is typically $5,000,000, although stronger projects can get higher amounts of financing.
For more info on the 7a click here.
504 Refinance Program - the 504 can also be used to refinance.
The 504 refi program was initially temporary after the last recession and was made permanent in 2016.
This program allows refinances up to 90% loan to value. Click here for more info.
The "permanent" 504 Refinance and Expansion program is available but is rarely used. This program allows hoteliers to refinance an existing property with cash out if they are expanding it or building or buying another property if the total project cost of the expansion is twice what they currently owe.
It should be noted that there are many more lenders willing to do 7a loans as those loans are more profitable on the secondary market, whereas there is a limited secondary market for lenders to sell their their 504 first mortgage loans,
The good news is there are quite a few more hotel lenders now then at the end of the recession.
USDA - The USDA also offers a program for properties just outside metro areas, semi-rural areas and rural areas, but it can sometimes be difficult to qualify for a refinance as they require 10% net tangible equity. If you are in an eligible area then it is worth looking to see if you could qualify as it is an attractive program for lenders and offers a 30 year amoritization. Please contact us for details.
CMBS - CMBS loans offer very attractive terms for larger loans for higher end properties. Maximum loan to value is typically 75%. Cash out is not a problem and the loans are NON-recourse, fixed for up to 10 years with a 30 year amortization.
Bridge Financing - Hotel Bridge Financing is available for various purposes including conversions, renovations, PIPs,etc.
Please contact us for more information at 1-800-414-5285
For complete information about refinancing via the 504 program, please visit our refinance page. It will be updated as new information becomes available. You can access it here: SBA 504 Refinance Guidelines.
Hotel & Motel Financing - More Info/State of the Current Market:
- Loans are available for experienced hoteliers to purchase well maintained properties with good cash flow as well as for turnarounds of existing properties
- Loans are also available for mom and pop motels for good borrowers
- Refinances are available as noted above*
- Construction financing is available for qualified borrowers, especially in areas with a solid economy (a good example would be parts of Texas)
- The 7a program can accommodate loans up to $5 million and higher.
- The 504 can accommodate much larger loans
- Independent hotels and motels are financeable
- Flagged properties are a little easier to finance in the current environment, but there are now more options for independents
- 10% to 15% down is possible for experienced hoteliers under the 7a and 20% is more the norm for the 504. Hoteliers who currently own (or very recently owned) at least 1 profitable property are eligible for 15% down under the 504 if the new loan qualifies as an expansion of their existing business.
- Guarantors/Management should have solid hotel management or ownership experience
- PIPs and renovations are eligible to be financed
- Bridge Loans are available
- FFE can be financed
Finance Multiple Hotels IF 10% More Energy Efficient
A change to SBA 504 guidelines has made it possible for hoteliers to access more credit via the 504 loan program.
Specifically, if you currently own a hotel and you acquire or build another property and the new property is 10% more energy efficient than your existing property then you may qualify for an Energy Efficient 504 loan which effectively removes the maximum eligibility limits for SBA financing.
SBA financing typically has eligibility limits of $5 million in total financing per borrower unless you are financing an energy efficient property.
Green and Energy Efficient 504 projects are exempt from regular SBA policies regarding jobs creation/retention andmaximum SBA eligibility and the new guideline removes the $5 million cap on eligibility as long as the project being financed is considered energy efficient.
In other words, SBA will now calculate maximum eligibility on a "per project basis" which makes it possible to finance multiple energy efficient projects with a 504 loan. This is big news for experienced hoteliers acquiring additional existing properties especially when you consider that businesses with net tangible assets of up to $15 million and net income of $5 million can now qualify for SBA financing.
Click here for detailed information on what it takes to qualify.
"A-" SBA 504 Program For Those Returning to Profitability
This program is available for hoteliers who can show that they have returned to profitability and who fit into the parameters of the SBA 504 program.
This program is specifically for experienced hoteliers whose business has rebounded from the lows of the Recession.
Good candidates are those who meet the requirements for the SBA 504 or the 7a program who possibly lost money a few years ago, but have since turned a profit and continue to show positive trends.
Ideal candidates for this program:
- limited service
- flagged hotels
- primary or secondary market
- loan amount in the $1-5MM range.
Qualifying for the "A-" Hotel Lending Program:
- Credit scores: Generally at least 640 (with Letter of Explanation regarding derogatory accounts)
- LTV: Up to 80%
- Minimum loan amount: $1million
- Maximum loan amount: $12 million, but anything above $5 million can be difficult
- Flag/No flag: Flagged preferred, but will consider independent hotels/motels.
- Interior Corridor Only
- Required DSCR: Prefer 1.25X, but all transactions considered case by case
- STAR reports: Must show Positive trends
- Occupancy: No specific minimum occupancy, but transaction must cash flow
- Leased land: Leasehold, ground leases are technically possible
- Improvements/Renovations/Upgrade Costs (For Acquisitions): Allowed, but renovations must be completed in approx 120 days
- Financial's/Tax Returns: Must have most recent tax year returns completed and YTD Financials. (Borrower prepared Financials are OK)
504 Hotel Financing Highlights
- Much larger loans now possible with recent changes to program
- Very low rates and long term financing
- Minimum 15% down payment or equity injection
- Increased SBA Eligibility if you Go Green
- Readily available for Acquisition
Click here: SBA 504 Refinance to find out more about the refinance option
The SBA 504 is ideal for, but not limited to, larger, limited service, flagged properties whereas the 7a is excellent for anything under $5 million. Below is a list of hotel and motel brands and franchises frequently financed with SBA financing:
Home 2 Suites
Extended Stay America
Best Western Inn
Choice Hotels International
Comfort Inn & Suites
Country Inn & Suites
Hilton Garden Inn
Holiday Inn Express
Microtel Inn and Suites
Super 8 Motel
Hilton Garden Inn
Econo Lodge Motel
Hotel Bridge Loans
Bridge loans are also available for acquisitions, conversions and renovations.
This is another recent development as it was difficult to get financing for an under performing hotel in past years, but there are now lenders who will fund these loans for the right borrowers with the right opportunities.
Funds are also available to finance a PIP, purchase FF&E or for equipment including energy efficient equipment. (This program requires the property to be either an "upscale" independent hotel or flagged hotel to qualify).
Please contact us for more info.
Please contact us at 1-800-414-5285 for more info re:
- hotel financing
- motel financing
- small hotel financing
- USDA hotel loans
*Please check with your accountant and the proper parties to verify eligibility and tax deductibility.
**"Going Green" also gives you significant tax deductions in most states since almost all states (and the Federal Government) have created major tax advantages for companies that adhere to green building and energy efficient guidelines. (There is currently a 30% Federal Grant for renewable energy "property" that can be used towards your down payment/equity injection).
Solar & Energy Efficient Technology Financing for Hotels
Solar panels - either roof mounted or on the ground - can be financed with a "green 504 loan" since the program allows financing of equipment with a useful life of 10 or more years. (Solar panels are eligible since they are expected to last up to 25 years).
There are numerous federal and state grants and incentives available.
It is also possible to finance energy saving technologies that make your hotel more energy efficient and we can assist with equipment financing for various systems.
Please contact us at 1-800-414-5285 for more information.