There are many reasons why an SBA Loan is one of the best options for hotel owners.
Whether you are well versed in SBA hotel financing or new to the hospitality
industry, here is a quick refresher about the main characteristics and benefits of the SBA 7(a) and 504 for hotel operators.
Both programs allow borrowers to have relatively high loan to value (LTV) of up to 85% and a low down payment.
This combination enables hotel managers to enjoy a much higher cash flow than they would with certain other types of financing.
The 7(a) is a favorite of many hoteliers because of its versatility.
This is because it can be used in so many ways:
The 7(a) also has the added benefit of providing hotel borrowers with up to $5,000,000 in funding.
Other important features include low prepayment penalties and a maximum interest rate of 2.75% + the Prime Rate Index.
SBA 7(a) hotel loan example:
We recently worked with a hotel investor who owned a Bed & Breakfast property in up state New York.
At that time, he was in a hard money note and needed to find something long term with a lower interest rate.
He wanted to do a cash out refinance to buy an adjacent property, add new rooms, build a wedding pavilion and add a yacht dock for his guests.
But there were two major problems getting in the way:
Just a year earlier, a hurricane had swept through and essentially wiped out much of the property, which meant for that last year, the B & B only had limited financials to show.
The other problem?
Even though the hotel owner had years of experience and owned multiple hospitality properties, the banks he had always worked with didn't feel comfortable doing a conventional loan for a Bed and Breakfast.
This was the perfect situation for an SBA 7(a) hotel loan:
The borrower had a “special situation property”, limited history of financials and in this case, was had a non-flagged hotel property (meaning it had no franchise tag).
We were able to secure a 25 year, fully amortized SBA 7(a) loan with a variable rate that allowed the hotel operator to leave the hard money loan behind and expand his Bed & Breakfast.
Financing hotel loans with SBA 504 loans.
The 504 program has become a great choice for new hotel construction financing as well as for expanding and buying existing hotel facilities.
This has created hotel financing options that would be almost impossible with other types of funding.
A great example is the the lesser known “Green 504”.
Hotels chains like Comfort Suites, Holiday Inn and Best Western have taken advantage of a growing movement toward better energy efficiency in order to be approved for larger projects and much large loan amounts.
Let’s say you are looking to purchase a Travel Lodge in California:
If you show the lender that you plan to purchase solar panels that will increase energy efficiency by at least 10%, than your SBA hotel lender may allow you to borrow up to $5,500,000.
But there is another added benefit:
If approved for a “Green 504”, a hotelier can borrow that amount for multiple properties and projects.
This means you are no longer limited to the size of your hotel loan.
Let’s take a look at the above example one more time, but this time you, the hotel buyer, will add another property into the mix:
Now you want to buy the Travel Lodge and do a total renovation of a nearby Econolodge:
The total project costs are close to $16,000,000.
By applying for an SBA 504 loan, the bank has agreed to fund the loan and provides you with a first mortgage of $8,100,000 while the SBA 504 portion would total $5,500,000.
This means that you, the hotel buyer, would be injecting $2,400,000, or 15%.
By just agreeing to add solar panels that cut your energy costs by 10%, you are able to not only get a bigger loan, but now you are able to finance more than one property at the same time.
First time hotel buyers and property improvement plans.
504’s also enable small to mid-size hotel owners to include much needed property improvement plans (PIP) into their hotel financing.
As a hotel owner and operator, you can imagine the benefit of being able to include renovation or furniture, fixtures and equipment (FF&E) into one hotel loan package.
It frees up much needed cash flow for other working capital needs.
First time buyers can also benefit from the 504 program.
This comes as pleasant news for would-be hotel owners since many non-SBA
lenders tend to shy away from lesser experienced hoteliers.
These other lenders look to stricter guidelines when considering hotel funding, including a long track record in the hotel business, higher down payments and stronger cash-flow requirements.
But remember, even though many hotel buyers choose SBA loans, you still have to have to adhere to some standard guidelines.
These include but aren’t limited to upward trending RevPAR’s, ADO’s, ADR’s and competitive STR Reports.
For more information on hotel financing with SBA loans talk to one of our hotel lending experts today.