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Review of the USDA B&I hotel loan program


Purpose: Acquisition, refinance, construction
For refinances, the loan can be used to consolidate existing loans and franchise PIPs and renovations, etc.


Eligibility: There are limitations
Hotels qualify if they do not include a golf course, casino, gambling facility, and racetrack. Ownership in the hotel by military or government employees need to be under 20%

Additionally, hotels need to be in the rural areas

Press to go to USDA webpage and see if your hotel is in the qualified area
Click to see if your hotel is in qualified USDA area


Tangible Equity for purchases: 20% to 25%
USDA loans require a proforma tangible equity of 20% to 25% for a hotel purchase depending on the state the hotel is located in. Assuming that the appraisal's real estate valuation is equal to the hotel purchase price of $3,250,000, the proforma balance sheet will look as follows:

Proforma Balance Sheet

ASSETS
Checking account after closing:$30K
Building (appraisal):$3MM
Land (appraisal):$250K
TOTAL ASSETS:$3.28MM

LIABILITIES

USDA loan obtained:$2.6MM
TOTAL LIABILITIES:$2.6MM

NET WORTH

680K and this is 20.7% of the total assets

Note: Assets such as franchise fee, loan costs, good will of the business, etc. that are on the balance sheet are not tangible and not qualified


Tangible Equity for Refinance: 10%
USDA loans require a proforma tangible equity of 10% for a hotel refinance. If the hotel purchased in the previous example is to be financed many years later when the balance sheet reflects depreciated building and improvement as $2.1MM, the tangible equity for a loan of 2.8MM is calculated as follows:

Balance Sheet

ASSETS
Checking account after closing:$20K
Building (appraisal):$2.1MM
Land (appraisal):$250K
TOTAL ASSETS:$2.37MM

LIABILITIES

USDA loan obtained:$2.8MM
TOTAL LIABILITIES:$2.8MM

NET WORTH

The balance sheet need to show $280K equity which indicates that the owner has to inject $710K into the checking account to raise the asset to$3,08MM

Note: As seen here, the refinance of hotels through USDA loans are generally tough to achieve because the hotel's balance sheet reflects the depreciated value as opposed to the appraised value


Rate: 4.5% to 5.5%
The index used is generally PRIME. The determination of the rate is dependent on the hotel, the sponsors, and the geographic location of the hotel. Customary rates are variable or fixed for five years going variable in the 6th year, reseting for another five, or reseting every five years


Maximum Loan: 10 Million


Maturity: Full term
If the amortization is 25, the maturity is 25 and if the amortization is 30, the maturity is 30


Minimum Loan: 1 million

There is less appetite for our national lenders to fund smaller loans. However, for strong projects, we do consider loans below 1million


Loan to Value: Up to 70% to 80%
Each state's USDA office sets the maximum loan to value based on its economy. In many states the maximum LTV for hotels is 80% but in some states it has been at 75%. In each case, we first check with the state's B&I office to get an update on the maximum LTV before starting the project


Debt Service Coverage Ratio (DSCR): 1.25


Reserves: None


USDA Guarantee fee: Varies with the loan amount
Loans of up to 5 million: 80% guarantee- Fee: 3 points on 80% of the loan
Loans of 5 to 7 million: 70% guarantee- Fee: 3 points on 70% of the loan
Loans from 7 to 10 million: 60% guarantee - Fee: 3 points on 60% of the loan

Example: on a 4 million loan, the guarantee fee is $4MM x 80% x 3% = $96,000


Initial Deposit: $8 to $10K
Upon signing of the Letter of Intent issued by our lenders, the borrowers will send in a good faith deposit to our lender (no fee is collected by Scientific Capital). The Lender uses this deposit to order the third party reports such as the appraisal and the Phase I report. Any balance left from this deposit will be applied to the closing costs. This deposit will generally appear on the closing statement


Amortization: 25 to 30 years


Prepayment: 3 to 5 Years
The prepayment is generally declining 3 or declining 5 although there are different variations depending on the source we use


Points: Generally up to 1 point
Lenders either have no charge or up to 1 point on the loan


Costs: $11.5K to $20K on the average
The cost estimate includes the following items:
  • Lender processing fee: 1K to 4K
  • Appraisal and the review: 4K to 6K
  • Environmental Phase I report: 2K
  • Survey: 2K to 3K (Only if a copy is not available)
  • Lender legal fees: 2K to 4K  (only if lender uses outside closing attorney)
  • Misc such as credit reports, tax services, UCC search, etc.: $500 to 1K





Benefits of the USDA B&I loans for hotels


Maximum allocation per borrower/business: NONE
As opposed to SBA loans with 5 million allocation limit, B&I loans impose no limit and a B&I loan can be used by a hotelier any number of times to acquire or refinance any number of hotels


Sponsor: Investor as opposed to owner operator
Unlike the SBA loans that can be only be used by owner operator hoteliers, the B&I loan can be used for investment where a non-hotelier acquires a hotel and places a management firm to run it


Refinance of existing government loan: Yes
Can be used to finance other government guaranteed loans such as 7(a) and 504





Drawbacks of the USDA B&I loans


Citizenship: 51% US Citizens


Tangible Equity Requirement
Tangible equity is having less impact for a hotel purchase than refinance. In case a hotel has been owned by the same owner for a few years, the depreciation of the assets is so high that the equity of 10% requires high liquidity on the balance sheet to meet this loan requirement


Processing time frame: 75 days +
Since the USDA processes the loan separately and parallel to the bank, it takes longer to complete the financing


Cashout: Not possible
USDA loan proceeds can only be used for the borrowing business. The borrowers cannot cash-out from the hotel's equity for cases such as:
  • Inject equity in other investments
  • Pull cash out and hold
  • Payoff debts not incurred by the hotel
  • Pay off personal debts that are not incurred by the hotel - HELOCs and personal credit cards if used specifically for the business with proof of the use of funds maybe refinanced by 7a loan
However hotel may be refinanced to include PIPs (Property Improvement Plans), renovations, remodeling, acquisitions of FF&E, pay off and consolidate multiple loans including lease loans, credit cards, lines of credits, and others, buy out of other partners, transfer of ownerships, and other business related liabilities and expenses.





Our other popular hotel loan programs


Press to go to go to our CMBS hotel loan page Press to go to go to our SBA 7a hotel loan page Press to go to go to our SBA 504 hotel loan page
CMBS
SBA (7a)
SBA 504
Press to go to go to our Bridge hotel loan page Press to go to go to our Conventional hotel loan page Press to go to go to our Construction hotel loan page
Bridge
Conventional
Construction



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