USDA Business and Industry Guaranteed Loan Program – Motel and Hotel Financing
Motels and Hotels must meet all the normal B & I Loan standards. In addition, because they are single-use, special purpose facilities which are particularly vulnerable to economic downturns caused by high gas prices, etc., added strength is generally required as outlined below:
- Up to 80% LTV (max) on Real Estate is the normal standard because they are special purpose facilities.
- Up to 85% LTV (max) on Franchised Real Estate is acceptable because of the added benefits of the franchise.
- 25% LTV on the Furnishings, Fixtures, & Equipment (FF&E). Motel FF&E is very depreciable and had limited saleability if removed during liquidation. Loans on motels & hotels should always be collateralized by both the real estate & FF&E, since the two are integrally related. A first lien position on both is important. If another lender holds a prior lien on either the real estate or the FF&E, additional discounting of the LTV is appropriate.
- New or Not-Yet-Established Businesses – – 25% tangible balance sheet equity at guaranteed closing.
- Established, Profitable, Business – – 10% tangible balance sheet equity at guaranteed closing.
- Collateral Analysis should use the current, “as improved” fair market value of the property.
- The value of the FF&E should be broken out separately from the value of the Real Estate
- Feasibility Studies are required on all new motel & hotel projects. They must be separate & distinct from the real estate appraisal and prepared by independent consultants with an established expertise in the hospitality industry.
- The feasibility study should include detailed information of Supply, Demand Analysis, Occupancy & Average Rate Analysis, & Net Income Forecast.
- Loans for Real Estate purposes may extend up to 30 years.
- Loans foe FF&E should not exceed the useful life of the furnishings – – 7 years.
- A Blended term in a blended loan is permitted.
Income Statement Analysis:
- Depreciation is a real expense, so adequate provisions should be made for regular repairs and upgrades.
If the motel/hotel is a franchise, the loan agreement should require the borrower to maintain the franchise flag. Loss or termination of the franchise without the lender’s consent would constitute a non-monetary default.
If the motel/hotel is a franchise, a “comfort letter” should be obtained from the franchisor stating that the franchise will maintain its flag on the property during liquidation.
8655 E. Via De Ventura, Suite G-200
Scottsdale, AZ 85258
Phone: (602) 885-1080