Financing A Hotel Project with an SBA 504 Loan

As posted in CREW EAST BAY’s Winter Hospitality Issue.

Although the availability of hotel financing has increased since the 2008 recession, the number of active lenders in the hotel construction sector remains limited. Conventional financing can be difficult, as hotel properties are not easily converted to other uses and thus are classified as “special-use properties.” As a result, many commercial lenders continue to operate with strict underwriting standards and can require hotel owners to come up with a down payment of 35–50%.

The Small Business Administration (SBA) 504 commercial real estate loan program offers a potential solution that savvy hoteliers should consider utilizing when financing a hotel purchase. Because a certified development company (CDC) partners with a conventional lender, the 504 program greatly reduces the commercial lender’s risk and also provides significant advantages to the borrower. Typically, SBA 504 loans for hotels are structured to provide up to 85% financing, with a below-market fixed rate, fully amortized for 25 years. The 504 program is structured in three parts: the first mortgage from a commercial lender for up to 50% of the total project cost, an SBA 504 second mortgage for as much as 35%, and a down payment of as little as 15% from the hotel owner.

SBA 504 Program Success Story

In spring 2018, hotelier Anil Patel—raised in the hospitality industry and recognizing the growing market and rising interest rates— used the SBA 504 program to finance the $10.6 million purchase of a 34-room independent hotel in San Francisco for his franchise, Signature Inn and Suites. Thanks to the 504 program’s fixed interest rate and low down payment, Patel was able to expand his hotel portfolio in an ideal location in downtown San Francisco close to
many tourist attractions and public transportation.

SBA 504 Energy Efficiency Program & Hotel Construction Loans

Millennial travelers value green, healthy, and authentic experiences, which is forcing much of the hospitality industry to invest in renovations or ground-up construction plans. The SBA 504 program allows hoteliers to finance multiple projects—up to $16.5 million—if energy efficiency upgrades are being implemented. To qualify for the SBA 504 Energy Program, at least 10% of the property’s energy needs must be generated on-site. This is easily accomplished with energy-efficient lighting or the addition of solar panels, which play very well when marketing the property to potential guests. Sam Devdhara, a seasoned hotelier in the Bay Area who has financed motels in San Francisco, Livermore, and Santa Clara, noted that it pays to look into the 504 option. “Because the SBA 504 program is available, independent hotel owners can get into the business with a smaller outlay of capital,” he said. “That allows us to make improvements on older properties and upgrade a community’s
accommodation offerings.”

While some lenders recommend removing furniture, fixtures, and equipment (FF&E) costs from the overall construction loans, the SBA 504 loan allows FF&E and other soft costs to be rolled into the loan. This flexibility is what makes the SBA 504 program so
attractive for current hotel projects. It allows hotel owners to take advantage of today’s expanding market with a customized financing package.

Support from A Certified Development Company

A certified development company is a nonprofit corporation established to support economic development in its community through the SBA 504 loan program. CDCs are regulated by the SBA and strive to be the borrower’s advocate throughout the life of the loan. CDCs complete the SBA paperwork and guide the borrower through the entire loan process.

Is a 504 Loan the Right Choice for You?

Property acquisition through an SBA 504 loan is an accessible and affordable way to grow your hotel business and solidify your financial security later in life. The 504 program allows hotel owners to smartly invest in their business by either purchasing new facilities or making improvements to their existing ones.

Qualifying for a 504 loan is easier than you may think. In fact, most businesses in the US qualify, as long as they meet a few simple guidelines as a privately-owned business that operates for profit.

Anna O'Brien

SVP, Business Development at TMC Financing
Anna O’Brien is a Senior Vice President of Business Development for TMC Financing, serving lenders, brokers and small businesses throughout the East Bay, San Francisco and the North Bay. As SVP of Business Development, Anna guides her clients throughout the entire loan process, helping them secure SBA 504 financing. Anna’s deep understanding of the first mortgage loan process helps her match her clients with the best lenders. Anna has many longstanding relationships with all types of first mortgage lenders.