Financing the purchase of a Hotel with SBA 7(a) in Indiana
The borrower’s goal in the financing of this hotel was to increase the Loan to Value (LTV) to 85% and to have as low of interest rate as possible. SBA’s requirement on Loan to Value for special/single use properties such as hotels is 15% for expansion and 20% for start up. This means that if a hotelier has other affiliates (hotels) and is buying another hotel, he can have a loan to value as high as 85%, otherwise the maximum LTV is 80%.
In case of a start up where a borrower does not have other hotel affiliates or for a ground up project, SBA 7a and 504 are structured differently. As an example, for a 504 loan, 20% equity is absolutely required but in case of 7a loans, borrower can leverage seller carry and can also pledge additional collateral to reach higher than 80% LTV.
In case of expansion, 504 does not require additional collateral but 7a loans do require that if additional collateral with sufficient equity is available that it will be pledged by the borrower to further securitize the loan. The lien may be removed upon request by the borrower when the 7a loan is seasoned in few years and an appraisal proves sufficient LTV of 75% or lower.
In both cases, the seller carry can be applied to equity. However, the total loan stack has to debt service at 1.25 which means the net profit of the hotel has to be 125% of the annual payments. For 7a loans, the carryback may need to be on Standby but 504 loans do not require Standby.
Thank you very much for your help to getting financing for Red Roof Inn North Indianapolis. You have been extremely knowledgeable, professional, and instrumental in our deal. I admire your depth of knowledge in hospitality financial business. I have learned a lot from you ever since I meet you and you financed my Motel 6 of Evansville. I am looking forward to work with you for my next project without any hesitation.
I will recommends you to all my hotelier friends. Again you have been extremely helpful, and hardworking gentlemen, and scholar. Thank you very very much for your timely effort and support.
Vipul Shah visiting Ramin at the Scientific Capital booth at the AAHOA 2016 in Nashville
Nate and his wife visiting us at our booth at the AAHOA 2019 in San Diego