Scientific Capital

Hotel SBA 504 Loan

Review of the SBA 504 hotel loan program

The loan will consist of a first commercial loan at minimum of 50% Loan to Value (or cost) and a 2nd loan by the SBA in the 2nd position at maximum of 35%. The commercial lender closes the permanent loan of the 50% and an interim loan equal to the SBA 2nd loan. SBA then funds the interim loan in 3 to 4 months
At this time SBA 504 can only be used for the acquisition of hotels or to finance a newly developed hotel. It can also be used for renovations under certain conditions
The rate on the first commercial loan is generally fixed for five turning adjustable for the 2nd five years or reseting. In our market, the rates are from 4.25% to 5.25% The SBA debenture has a 20 year fixed rate that is issued by SBA every month and the rate table on the home page of our web site reflects the latest SBA rate
Although the only limit is on the 2nd SBA loan to be 5 million (5.5 million if SBA green 504 with renewable energy program), the commercial lender may lend more than 50% of the project cost (or value). In that case, as the total cost of the project rises, the commercial lender may lend higher than 50% to maintain the combined loan to value at 85%. This theoretically increases the loan to much higher numbers such as 18 to 20 million
This means that if you divide your Net Operating income (before depreciation and interest) by the annual debt service, the ration should result in 1.25 or higher
This loan does not require FF&E reserves and the lender does not escrow taxes and insurance
Most of this deposit is used by the commercial lender to order the third party reports such as the appraisal and the Phase I. The CDC who process the SBA loan has $2500 good faith deposit

The 2nd loan is fully amortized which means it is amortized for 20 and matures in 20 years
The commercial loan can be amortized at 15, 20, 25, or 30 but cannot mature in less than 10 years.

The commercial loan’s prepay is negotiable and generally 3 to 5 years. The 2nd loan has a 10 year declining prepay
The Total SBA and the CDC fee varies depending on the loan amount but a good estimate is 3% of the 2nd loan amount
The points are only charged by the first lender and varies with the lender but generally it is 1.5 points of which half point is paid by the lender to the SBA. The lender may or may not charge points on the interim loan
  • Appraisal: About $5K
  • Phase I: About 2K
  • Lender processing: About 4K

There may be additional charges such as survey, if one is needed and the owner or the seller does not have a copy, lender legal fees, if our lender uses external attorneys to close its loans. We generally try to avoid lending sources that use outside closing attorneys

SBA is strict about requiring guarantee from any partner that owns 20% or more shares of the company. If a partner is not willing to offer full guarantee, the partner has to reduce the ownership below 20%
It is important to make certain that the first loan is assumable. However, the 2nd loan is assumable but the buyer need to be qualified to assume the loan

Benefits of the 504 loans for hotels

The SBA loans offer the highest LTV and the lowest equity injection requirement. Upon lender and SBA approval, portion of the down payment can even be carried by the seller with the buyer placing between 5% to 10% of equity
These loans are assumable and the borrowers can have the buyer of their hotel assume these loans to avoid a the hefty prepayment penalty
Many conventional lenders only finance the real estate portion of the hotel but the SBA does include the FF&E and the PIP/renovation costs
With the SBA guarantee, our lenders have appetite to finance hotels in all tertiary markets and in all fifty states. No longer a hotelier is limited to their local community banks for financing

Drawbacks of the SBA 504 loans

The SBA504 2nd loan is processed by the CDCs and is approved by the SBA directly. It is an extremely time consuming process. The CDCs are often understaffed and cannot meet project time line. Any inquiry by the CDC to the SBA takes 20 to 30 days and projects may take up to 5 or 6 months if they have complexities. Hotel franchise agreements have to be approved by the SBA for each loan and that takes 30 to 60 days. In essence, the SBA works with no deadline in mind. This is a loan of the last resort
CDC processing and the guarantee fee of the 2nd loan cost is high and at about 3% of the Debenture makes this loan very expensive
The SBA loans can only be used for owners who operate the hotel and cannot be used for real estate investors who run the hotel through management companies

SBA loan proceeds can only be used for the borrowing business. The borrowers cannot cash-out from the hotel’s equity for cases such as:

  • Buy out other partners(This is allowed for SBA 7(a) loans)
  • 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, and other business related liabilities and expenses

The 504 loans cannot be used to refinance a hotel
51% of the ownership of the hotel must be with Legal Permanent Residents (LPR) or US citizens
Unless 51% of the hotel ownership is by minorities who are US Citizens (Green card is not accepted), there is a significant job requirement that may make this loan not suitable for hotels as hotels do not have large staff and do not increase employees significantly over time

Our Other Popular Hotel Loan Programs

SBA (7a)