In the ever-evolving hospitality industry, innovation and financial security is crucial for success. However, many hoteliers find themselves constrained by conventional financing options.
Fortunately, there is a game changing solution: the Small Business Administration’s (SBA) 504 Loan Program. With the program, hoteliers can construct, purchase or refinance hotel facilities with only 15% down payment and a below-market rate, fixed for 25 years.
As an extra bonus, when green energy initiatives are implemented, there is now no limit to the number of SBA 504 fixed-rate loans or the aggregate amount of SBA dollars outstanding that a business owner can have.
The loan is a second mortgage loan backed by the SBA that offers below-market, fixed interest rates, fully amortized for 25 years. It typically represents 40% of the total project cost and is capped at $5 million for most businesses. The first mortgage is provided by a conventional lender, typically covers approximately 50% of the total project cost.
The program allows business owners to qualify for additional financing when specific energy efficiency requirements are met. Under this initiative, the SBA 504 second mortgage is increased to $5.5 million per project. There is no limit on the first mortgage amount, thereby eliminating the cap on the total project cost.
Recent updates to the program have expanded lending opportunities even further for green projects. Businesses that implement energy efficiencies can access unlimited SBA 504 loans, without any restrictions on the aggregate dollar amount outstanding. This means that even if a business has already reached the traditional $5 million cap with SBA 7a or 504 loans, it may still qualify for additional SBA 504 loans by incorporating energy-efficient measures. Previously, there was a three project and a $16.5 million cap for green projects.
To qualify for the program, a business must either purchase or construct a new building that consumes at least 10% less energy than its previous building. Alternatively, businesses can qualify by generating at least 15% of their current energy use from renewable sources such as solar or wind.
Hotel projects can qualify for up to 85% financing with no total project maximum. Many hoteliers are realizing that the SBA 504 Loan Program is the most advantageous way to purchase, construct or refinance new facilities. Some benefits include:
- Up to $5.5 million per project on the SBA second mortgage
- Flexible financing: There is no limit on the number of projects or the maximum dollar amount outstanding
- Preserve cash flow: Up to 85% financing at below-market, fixed interest rates—no future interest rate fluctuations.
- Attractive terms: 10–, 20– and 25-year amortization terms available.
- Versatile use of funds: Utilize the funds for various purposes, including purchasing, construction (including land), expansion, renovation and equipment/furnishings.
Most hoteliers, either franchised or independent, qualify for the SBA 504 Program, as long as the net profit of the company is less than $6.5 million and the net worth of the company is below $20 million.
The expanded capabilities of the SBA 504 Green Energy Program provide hoteliers focusing on green energy with unparalleled opportunities for growth and development. By leveraging these loans, businesses can not only meet their immediate financial needs but also contribute to long-term sustainability and economic health.
The SBA 504 second mortgage is provided by a Certified Development Company (CDC). CDCs are nonprofit organizations that administer the 504 loan on behalf of the SBA. There are approximately 200 CDCs in the U.S., all regulated by the SBA and charge the same fees.
Kurt Chambliss is EVP of TMC Financing, a certified development company (CDC) that has provided real estate financing in Arizona, California, Hawaii, Nevada and Oregon for more than 40 years.
This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.
