Scientific Capital

Hotel USDA Loan

Review of the USDA B&I hotel loan program

For refinances, the loan can be used to consolidate existing loans and franchise PIPs and renovations, etc.

Hotels qualify if they do not include a golf course, casino, gambling facility, and racetrack. Ownership in the hotel by military or government employees need to be under 20%

Additionally, hotels need to be in the rural areas

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Click to see if your hotel is in qualified USDA area

USDA loans require a proforma tangible equity of 20% to 25% for a hotel purchase depending on the state the hotel is located in.
USDA loans require a proforma tangible equity of 10% for a hotel refinance for a hotel depending on the state the hotel is located in.
The index used is generally PRIME and the rates are either variable or fixed
If the amortization is 25, the maturity is 25 and if the amortization is 30, the maturity is 30
There is less appetite for our national lenders to fund smaller loans
Each state’s USDA office sets the maximum loan to value based on its economy. In many states the maximum LTV for hotels is 80% but in some states it has been at 75%. In each case, we first check with the state’s B&I office to get an update on the maximum LTV before starting the project

Loans of up to 5 million: 80% guarantee- Fee: 3 points on 80% of the loan
Loans of 5 to 7 million: 70% guarantee- Fee: 3 points on 70% of the loan
Loans from 7 to 10 million: 60% guarantee – Fee: 3 points on 60% of the loanExample: on a 4 million loan, the guarantee fee is $4MM x 80% x 3% = $96,000

This amortization is what Scientific Capital can obtain through its national lending sources and not a representation of the program’s amortization
The prepayment is generally declining 3 or declining 5 although there are different variations depending on the source we use. This prepayment penalty is not a representation of the program’s prepayment and relates to what our sources offer

The cost estimate includes the following items:

  • Lender processing fee: 1K to 4K
  • Appraisal and the review: 4K to 6K
  • Environmental Phase I report: 2K
  • Survey: 2K to 3K (Only if a copy is not available)
  • Lender legal fees: 4K to 7K (only if lender uses outside closing attorney)
  • Misc such as credit reports, tax services, UCC search, etc.: $500 to 1K

Benefits of the USDA B&I loans for hotels

As opposed to SBA loans with 5 million allocation limit, B&I loans impose no limit and a B&I loan can be used by a hotelier any number of times to acquire or refinance any number of hotels
Unlike the SBA loans that can be only be used by owner operator hoteliers, the B&I loan can be used for investment where a non hotelier acquires a hotel and places a management firm to run it
Can be used to finance other government guaranteed loans such as 7(a) and 504

Drawbacks of the USDA B&I loans

Tangible equity is having less impact for a hotel purchase tha refinance. In case a hotel has been owned by the same owner for a few years, the depreciation of the assets is so high that the equity of 10% requires high liquidity on the balance sheet to meet this loan requirement
 
Since the USDA processes the loan separately and parallel to the bank, it takes longer to complete the financing compared to a bank loan

USDA 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.

Our Other Popular Hotel Loan Programs

Bridge
CMBS
Construction
Conventional
SBA (7a)
SBA 504

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