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
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
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
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
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 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