Financing Hotel Purchase with USDA B&I Loan in Michigan
Scientific Capital arranges a 3 MM USDA loan for the acquisition of the Comfort Suites in Michigan. The financing is an adjustable loan with 30 year amortization and 10 year maturity. The project was financed as 80% Loan to Cost (LTC) through the USDA loan and 5% through seller carryback for a total of 85% LTC. USDA required a 25% tangible balance sheet equity for this project.
The Michigan USDA is very selective in guaranteeing hospitality loans and is reducing its risk exposure by lowering the guarantee level to 70% and increasing the minimum tangible equity balance sheet requirement for a hotel acquisition to 25%.
The strength of this project stemmed from the financial strength of the borrower and the solid historical cash flow of the hotel even during the current economic downturn. The challenge was the borrower will not be an operator, a major negative for hospitality financing in this turbulent hospitality market. Lenders want to assure that the principals are hands on and have the experience to combat the upcoming economic challenges. USDA does allow investment financing as opposed to SBA that limits financing to owner operators.
In general USDA loans are probably one of the most cumbersome financing vehicles and should probably be used as the last resort. With the upcoming new Recovery Act SBA provision to guarantee the first trust deed of the SBA 504 loans and the current provision eliminating fees, leveraging an SBA loan while the Recovery Act budget is available may be the most viable option.