Scientific Capital

Hotel SBA 7a Loans

Review of the SBA 7(a) hotel loan program

This is a single permanent 25 year fully amortized loan with the SBA offering 75% guarantee to the lender reducing the lender’s risk exposure in financing riskier assets such as hotels specially at higher Loan to Values

The 7(a) loans can be used for any hotel financing purposes such as acquisition, refinance, partner buyout, Property Improvement Plans (PIP) and renovations, loan consolidation, and construction and permanent

The spread is determined based on factors such as the quality of the hotel, the sponsorship, the market and the level of the lender competition in that market. SBA (7a) loans are adjustable and change when the PRIME rate changes. However, starting 2014, few lenders are offering 3 or 5 year fixed rates on exceptionally strong hotel transactions. SBA has a hard ceiling of 2.75% for the lenders to charge on 7(a) loans. Scientific Capital has financed hotel 7(a) loans with fixed rates in the past
Although the maximum loan is 5 million, it is possible to structure commercial loans along side of the 7a loan called Pari Pssu to increase the loan amount
For an expansion of business (if one has hotels and is buying another hotel in the same market), the maximum Loan is equal to the addition of the value real estate at 85% plus the value of the FF&E at 10%. For a startup hotel (construction project) or purchase of a hotel in a new market, the maximum loan to value is 80% regardless
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 lender to order the third party reports such as the appraisal and the Phase I
The prepayment penalty is declining from 3% the first year, 2% the second year, and 1% the third year and no prepayment penalty after the third year

SBA guarantees 75% of a 7(a) loan and charges the guarantee fee as follows:

$35,000 for the first 1 million of guarantee

$3.75% for each additional million of guarantee
Example of calculating the guarantee fee:
Loan amount of $4 million has government guarantee of $3 million (75% of $4 million)
SBA fee= $35,000 + $75,000 = $110,000

  • Appraisal: About $5K
  • Phase I: About 2K
  • Lender processing, credit pull, etc.: About 3K

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%
The SBA 7(a) loans are assumable but the lender has to qualify the buyer who is assuming the loan. The loan’s credit grade cannot be lowered by having sponsors assume the loan that are not qualified

Benefits of the 7(a) loans for hotels

With the prepay of 3 years, the 7(a) loans can be considered a perfect bridge loan that offers short exit strategy but with no maturity for 25 years

Not only SBA loans allow high loan to value, but there are ways to increase the LTV such seller carry on portion of the down payment

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
SBA 7(a) loan can be used to finance an existing 7(a), SBA 504, or USDA B&I loans

SBA 7(a) loans are regulated and the lenders costs need to conform to the SBA guidelines. As such, hoteliers do not see exorbitant fees on their closing statements. Additionally, the lenders do not charge a point or hefty packaging or underwriting fees

Drawbacks of the SBA 7(a) loans

To avoid burdening the US citizens in providing the 75% guarantee to the lenders, the SBA collects a hefty guarantee fee which is used to compensate the lenders in case of borrowers default

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:

  • 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

The loans to be refinanced must have been current for 12 months. The hotelier must provide a bank transcript showing payments to have been current. However, many lenders require 24 months of payment history

The SBA loans are government loans and have the disadvantage of being burdened by so many policies and regulations. Although there are thousands of pages of policy rules, there are still questions that are ambiguous and left to interpretation by the SBA itself and by the lenders

51% of the ownership of the hotel must be with Legal Permanent Residents (LPR) or US citizens
Although SBA 7(a) loans allow for high loan to value of even 85%, for loans of over 75%, upon availability of equity and assets, the lender may require additional collateral in form of junior lien on those borrower/guarantor’s asset. If equity or assets are not available, the lender may fund the loan without requiring such collaterals

Our Other Popular Hotel Loan Programs

SBA 504