Review of the SBA 7(a) hotel loan program
Structure: Single loan
Purpose: Acquisition, refinance, construction
Rate: Current market average range: 1.0% to 1.75% over PRIME
Maximum Loan: 5 million
Loan to Value: Up to 85% of Real Estate Value plus 10% of FF&E Value
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
Debt Service Coverage Ratio (DSCR): 1.25
Reserves: None
Initial Deposit: $8K to $10K
Amortization and Maturity: 25 year amortized and due in 25 years
Prepayment: 3 2 1
SBA Guarantee fee: Varies with the loan amount
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
Costs: $10.5K plus
- Appraisal: About $5K
- Phase I: About 2K
- Lender processing, credit pull, etc.: About 3K
Personal guarantee: Full guarantee from any partner of 20% or more ownership
Assumption: The 7(a) loans are assumable
Short prepayment period
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
High Loan to Value
Assumption and transfer of ownership
FF&E and PIP costs are included
National coverage
Refinance existing government loans
Regulated costs
High SBA guarantee fee
Only for owner operators
No cash-outs
- 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
Loans to be refinanced must be in good standing
Many policies and regulations
Citizenship
Additional collateral
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