SBA Hotel Loans & 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
- SBA 7a
- SBA 504
SBA hotel lenders do a lot more 7a loans than they do 504.
There a few main reasons for this:
- The 7a is more profitable for lenders
- They get a higher “guarantee” from the SBA. (The SBA effectively insures a big chunk of the loan).
- 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:
- You can put less down – in some cases, only 10%
- 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 property, etc.
- It can be refinanced after just 2 years with a 1% prepayment penalty or 3 years with no penalty
- It can used for any legitimate business purpose – for instance, buying out partners, working capital, property improvements, debt consolidation, etc.
- It is fully amortized over 25 years with no balloon
The 7a is frequently a better choice for the following types of borrowers:
- First time hotel or motel owners
- Borrowers with imperfect past credit
- Borrowers who lack an ideal amount of experience
- Turnarounds/projections-based transactions
- Borrowers with less than 20% down
- Non-franchised properties
- Those who do not expect to own the property long term
The primary limitations of the 7a program for hotel financing are as follows:
- It is usually a floating rate, but some lenders offer 3 and 5 year fixed rates for stronger transactions
- The max loan is typically limited to $5 million
SBA 504 Hotel Loan Benefits
- 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.
- 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 refinances up to 90%.
- 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.
- If you use the SBA 504 Green program you can finance multiple hotels
- 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.
Have a question?
Common SBA Hotel Financing Questions:
Is it hard to get an SBA hotel loan? It can be but it really depends on the situation. Many people turn to SBA loans to finance a hotel or motel when their local bank cannot help. SBA loans are a more secure loan for a lender due to the guarantee the lender gets from the Small Business Administration and this guarantee removes a lot of the risk for the lender.
What is the minimum down payment for an SBA hotel loan/How much do I need to put down? SBA hotel loans require at least 10% down under the 7a program and at least 15% under the 504. 10% is usually only possible for the better transactions where a property has a history of good cash flow, is in a good location and where there is a good (typically experienced) borrower.
Can I borrow the down payment for an SBA hotel loan? Yes, you can actually borrow the down payment for an SBA loan. You will need to prove that you will pay back the borrowed funds from some other source of income (another job, another business or income from a spouse).
The down payment for an SBA hotel loan can come from multiple sources as outlined below. SBA lenders are fairly flexible within reason on this, meaning that if they are considering an otherwise good deal they will work to get comfortable with the source of equity on a transaction.
Ideally, a borrower needs to have some of their own “skin in the game,” as lenders want to make sure you are invested (enough) in the transaction to really work to make sure it either becomes or remains profitable.
How much experience do I need? In an ideal world, most lenders want a borrower who already owns at least one hotel or motel, but this is obviously not always the case.
We see a lot of SBA transactions where the borrower has been managing a hotel for someone else for a while and is ready to buy a hotel for themselves. These types of borrowers give lenders a level of comfort because if the borrower has enough management experience there is a good chance they are ready for most of the challenges presented by ownership.
It is also possible for those with no experience to purchase a hotel as long as there is a mitigating factor. For instance, we have seen transactions where lenders will approve a borrower as long as they hire a seasoned manager and make them a minority owner (usually 5% or less) and because they feel like the manager now has a vested interest in the success of the property they have an easier time issuing an approval.
We have also seen situations where a lender might allow the borrower to hire a management company who trains them for the first year at their own expense as that shows the lender the level of commitment the borrower has to the business.
And…we have seen lenders allow “third party managment” companies to manage the property as long as the management agreement does not give the management company too much control. In this case, the borrower will need to provide a detailed plan showing how involved they will be in the day to day operations as SBA requires that a borrower be very involved in the day to day aspects of the business.
Can you finance an exterior corridor property? Yes.
Can I finance an older property? Yes. Age is really not an issue as long as the property has been kept up and has a remaining useful life of at least 25 years.
Can I finance an independent hotel with an SBA loan? Yes. Independent properties can definitely be financed.
Can I buy an under-performing hotel with poor cash flow and turn it around? Yes, under the right circumstances. For most lenders, this will be a “no,” but if you have the right experience/right team, enough money down, a property in a good location and a solid business plan and projections, then “yes.”
Can I finance a property outside of the continental US? Yes, Puerto Rico, Hawaii, Alaska are easily “financeable.” Other U.S. territories are eligible, but harder to do.
Can I get a loan for a seasonal motel or hotel like on Cape Cod where the property would not be open year round? Yes, typically, well located seasonal hospitality properties do very well and make enough money in their season to cash flow the loan for the full year.
Can I buy a property in a different city or town from where I live? It depends. For a solid hotelier who already owns multiple properties and has a capable management team, this is usually an easy “yes.” For a first-time owner this would almost certainly be a “no.” Any borrowers that fall somewhere between those two extremes would be case by case. Ideally, a lender wants you to be hands-on “enough,” meaning that you are close enough to the property (geographically) that you could get there fast if there was a problem. They realize that absentee ownership has more potential for things to go wrong and affect the borrower’s ability to repay the loan.
What debt service coverage ratio or NOI is required for underwriting approval? Hotel lenders ideally like to see a debt service coverage ratio of 1.25 or better, but a lower ratio can certainly be acceptable depending on why the ratio is lower than it should be. Lenders will want to know the “story” behind a lower debt service coverage ratio or why a properties net operating income is sub-par. If it can be explained and you can show cause and effect for why things are the way they are AND provide a plan to remedy the situation then you might be able to get an approval.
Is there a REVPAR or ADR requirement? No
Will you put a lien on my house? Only if you are approved for less than 15% down under the 7a program
Can I cross collateralize another property instead of making a down payment? In some situations, yes.
Can I finance a boutique property? Yes
Can I get a loan with a bankruptcy? foreclosure? poor credit? Yes, Yes, Yes (with some lenders), BUT you need to be able to provide a good explanation for what happened and show that it was an isolated situation and that you are past it. Some lenders also have a minimum amount of time you must be past an issue like that to be eligible. (It is case by case).
Can I finance a PIP? Yes
Do I need to be at US citizen? No, but there are requirements.
How long does it take to close an SBA hotel loan? 60 to 90 days, but it can certainly happen quicker.
how long does it take to close a hotel construction loan? 60 to 90 days IF you have everything lined up (permits, zoning, etc.)
Do I need an energy audit to qualify for an SBA Green loan? Not necessarily
SBA Hotel Loan Down Payment Requirements
Ideally, SBA hotel lenders want all borrowers to be super strong and have lots of cash to put down, but this is rarely the case because if they did they would just go get a conventional bank loan.
SBA loans primarily exist to afford borrowers higher leverage or to smooth over imperfections with a transaction.
Under the 7a, experienced hotel owners (and sometimes really strong borrowers purchasing solidly cash flowing properties) can put down as little as 10%.
The SBA 504 requires at least 15% for a “business expansion” or 20% if you are a first time owner or if you have a different ownership group.
- Borrowed money
- Equity in another hotel or property
- Retirement Rollover – this is easily the most overlooked source of a down payment as most people do not know that you can rollover a 401k from a former employer tax and penalty free into an SBA loan.
SBA Hotel Financing – 90% Loan to Value Refinance Available
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 & Lending Guidelines
- SBA Hotel Loans under the 7a program typically max out at $5 million, although stronger projects with stronger guarantors might qualify for a conventional second mortgage allowing larger projects of up to $10 million to be financed.
- The 504 allows SBA hotel loans with 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 15% more energy efficient or if you can produce 15% or more of your own power (usually with solar power) then it is possible to finance mulitple hotels via the SBA 504 hotel loan.
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 provide SBA hotel 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 hotel 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
SBA 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 Guaranty (or a 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
SBA Hotel Refinancing
7a program – SBA hotel loans are available to refinance your hotel with the 7a program. The maximum loan limit is typically $5,000,000.
For more info on the 7a click here.
504 Refinance Program – SBA hotel loans can also be used to refiancne a hotel with the 504 program.
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 offer SBA hotel financing with the the 7a program 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 SBA hotel lenders now then in years past.
Other Hotel Financing Options
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.
SBA Hotel Loans & SBA Motel Financing – State of the Current Market:
- SBA Hotel loans are available for experienced hoteliers to purchase well maintained properties with good cash flow as well as for turnarounds of existing properties
- SBA Loans are also available for mom and pop motels for good borrowers
- Refinances are available as noted above*
- Hotel 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 SBA hotel loans up to $5 million and higher.
- The 504 can accommodate much larger SBA hotel loans
- Independent hotels and motels are financeable
- Flagged properties are a little easier to finance, but there are now more options for independents
- 10% to 15% down is possible for experienced hoteliers under the 7a and 15% to 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
The SBA 504 Green guidelines make it possible for hoteliers to access more credit via the 504 green 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, because Green 504 projects are exempt from regular SBA policies regarding jobs creation/retention and maximum SBA eligibility and the guidelines allow up to $16.5 million in total SBA hotel financing.
They accomplish this by calculating maximum eligibility on a “per project basis,” which makes it possible to finance multiple energy efficient projects with a 504 loan. This is helpful 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 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.
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-” SBA Hotel Loan 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.