• Loan Structure: A loan offered by the lender but guaranteed by the government. This loan is fairly popular with the lenders as a lender can sell the guaranteed portion of the loan in the secondary market. The maximum guarantee is as follows:

   

  Up to 5 million		80%
  5 to 10 million		70%
  Over 10 million		60%
  Since this program is administered by the states, each state may have slightly different level of guaranty for hotel assets. This may impact the lenders' appetite to offer hotel financing through USDA in different states

• Borrower's Citizenship Status: The business entity borrower should be 51% owned by a US citizen or resident. The individual borrower should be either a citizen or a US resident

• Maximum Loan Amount: 10 million (25MM in special circumstances)- Loans of up to 7 million are approved locally, but loans over 7 million need approval from Washington DC. This adds to the approval time for a loan over 7 million in size.

• Interest Rates: Negotiated with the lender making the loan. Currently the rates seem to be averaging 2.25% to 3% over PRIME index with most lenders pushing 2.75% over PRIME

• B&I Direct Costs: There is a one time guarantee fee of 2% of the guaranteed amount. As an example if the loan is 1 million and the USDA is guarantying 80% of the loan, then the USDA guarantee fee will be 2% of the $800,000 or $16,000.

• Personal Guarantee: Any partner or member of the buying entity having interest of 20% or more has to provide personal guarantee

• Maturity: The maturity of the real estate portion of a B&I loan is generally 25 or 30 years and the FF&E portion is 25 years. The bank may blend the maturities but balloons are not permitted.

• Amortization: The amortization of the real estate portion of a B&I loans is generally a maximum of 30 years and the FF&E portion maximized at 7 years but the amortization may be blended.

• Eligible Locations: To be eligible, a business must be operated in a rural area where the population of the locality is less than 50,000 but you should  Check to see if your location is qualified

• Tangible Equity: A calculation of the tangible balance sheet by the lender/USDA will determine the required proforma balance sheet tangible equity asset for the hotel. The minimum required for existing hotel is 10% and for a new hotel is 20%. Any purchase of a hotel in a new area however is considered a new business and not an expansion.

Case 1: Refinance: In order to estimate the proforma tangible equity, we start with the latest balance sheet (or the latest hotel's tax return schedule L)

 

Tangible Equity Balance Sheet Calculation

		Current balance sheet of the hotel	Debits	Credits	Proforma balance sheet of the hotel after the USDA loan is paid
	Assets: Accounts	60,000	55,000†		5,000
	Fixed Assets: Building and Equipment	3,000,000			3,000,000
	Fixed Assets: Land	250,000			250,000
	Total Assets	3,310,000			3,255,000
	Liabilities: Short term	22,000			22,000
	Liabilities: Long term	3,128,000	3,128,000‡	3,128,000*	3,128,000
	Total Liabilities	3,150,000			3,150,000
	Net worth	160,000			105,000
	Net worth and Liabilities	3,310,000			3,255,000
	†guarantee and loan fees ‡Payoff of the current note *New loan

The tangible equity percent in this example = 105,000/ 3,255,000 = 3.23%. The borrower however needs assets such that when subtracted from the liability gives 10% net worth. The calculation of the required assets is as follows:

Total required asset = $3,350,000 / 0.9 = $3,500,000

Total required cash injection at the closing = $3,500,000 - $3,255,000 = $245,000

Proforma balance sheet will then look as follows:

Required Final Proforma balance sheet of the hotel before closing the loan
Assets: Accounts	250,000
Fixed Assets: Building and Equipment	3,000,000
Fixed Assets: Land	250,000
Total Assets	3,500,000
Liabilities: Short term	22,000
Liabilities: Long term	3,128,000
Total Liabilities	3,150,000
Net worth	350,000
Net worth and Liabilities	3,500,000

The new tangible equity is 350,000/3,500,000 or 10%

The reason in this example the net tangible equity is low is because the business has been depreciating the hotel every year in its tax returns and the value of the hotel on the books has dropped to 3 million. One has to realize that the appraised value of the property may well be in the 4 or 5 million, but USDA only uses the value on the balance sheet.

Case 2: Acquisition of a new hotel: In order to estimate the proforma tangible equity, one has to consider that the state required tangible equity may be different than the required minimum down payment. In this example, we consider the minimum down payment to be 20% but the state required tangible equity to be 25%.

First the appraisal will determine how the purchase price of the hotel is broken down in the appraisal. Since the USDA loan has a low Loan to Value for FF&E and hotels are purchased in an entirety under one escrow (rather than having a second Bulk Sale escrow for FF&E and inventory, etc.), USDA relies on an appraisal to provide the value of the real estate and the FF&E. Assuming that the appraisal's real estate valuation is equal to the hotel purchase of the hotel at $3,250,000, the balance sheet will look as follows:

Required Final Proforma balance sheet of the hotel before closing the loan
Assets: Accounts	216,000
Fixed Assets: Building and Equipment	3,000,000
Fixed Assets: Land	250,000
Total Assets	3,466,666
Liabilities: Long term	2,600,000
Total Liabilities	2,600,000
Net worth	866,666
Net worth and Liabilities	3,466,666

 

In this example, in order to reach 25% tangible equity, the buyer/borrower has to deposit additional 216,000 in the buying entity's business account.

• Prepayment Penalty: The prepayment penalty is negotiated with the lender but in the current market, it is generally ranges from declining 5 to 10 year declining. Many lenders are offering flat 5 year for 5%.

• Major Features:

  1. Requires lower injection than a conventional loan

  2. Supports first time or investor (non-operator) buyers

  3. Has no maximum life time limit (unlike the SBA 2MM limit)

  4. Accommodates long-term investments with long-term maturity and amortizations with no balloons permitted

  5. Applies to non-flag independent hotels/motels albeit with lower Loan to value

• Major Disadvantages:

  1. Lengthy tedious process where the loan is approved by the lender, then the package is sent to USDA for complete underwriting and the USDA loan committee approval. Each state seem to have a variation of the process which may add days to the process. For example, in Nevada, the state USDA office has to obtain a sign off on the environmental report from the State of Nevada which is a two to three week process somehow included in the overall loan approval process.

  2. Tangible Asset Balance Sheet Equity requirement:  Many states are now requiring 15% for existing hotel and 25% for new hotel businesses. Very seldom borrowers have such a high liquidity. It is important again to note that the equity is not based on hotel appraisal value but the book value from the Schedule L of the tax return.

The following is a typical USDA B&I loan process:

 

	LENDER ACTIVITIES	DAYS	USDA ACTIVITIES
	Lender selected by Scientific Capital receives the loan application	5
	The lender Reviews the project and issues an Letter of Interest or LOI. Upon approval by the borrower, the bank starts the underwriting process	10
	The bank sends USDA a pre-application for preliminary opinion on the project by the USDA
		5	USDA receives the pre-application and issues an opinion which unless the loan is declined, it will include the terms required by the USDA for this project. The terms may include the required Tangible Balance Sheet Equity for this project, the minimum required injection by the borrower, etc.
	If the opinion is in line with the borrower's expectations, the lender will proceed with the underwriting and the third party reports
	Once the underwriting write up is complete and approved by the credit officer, the lender sends a copy of the write up to the USDA	40
	The lender submits all required USDA B&I forms and applications along with those filled out by the borrower to the regional USDA loan officer. This includes the 4279-1 and 1940-20 forms	10	USDA starts the official underwriting process
	The lender sends a request to the State Clearing House for an opinion on the project viability. Generally States take about 40 to 60 days to respond with their opinion. This is a key step to consider for new development projects		USDA regional officer performs a site visit of the hotel and interviews the buyer and the hotel management team
	The lender's loan committee approves the loan and the loan moves to the closing department
		30-90	Upon completion of the underwriting, the loan is presented in the USDA loan committee meeting. If the loan is over 7MM, the loan needs to be approved by the USDA office in Washington DC.
		6	Upon approval, the USDA obligates the loan. There is a 6 day wait period before the conditional commitment is issued to the lender
	The lender receives the conditional commitment. However, the lender can only close if the funds for the guarantee is available, otherwise, the closing is on hold until the funds are available by the USDA	5
	If the funds are available for guarantee, the lender closes the loan		Estimated 111-171 days to close
	If USDA requires additional tangible balance sheet equity, then the borrower has to inject sufficient funds to satisfy the required balance, obtain a CPA prepared balance sheet to show the tangible equity on the assets, and to send this balance sheet to the bank
			Once the USDA receives the required items including the balance sheet showing the required tangible equity, it will guarantee the loan
	The lender receives the guarantee and is able to sell the guaranteed portion of the loan in the secondary market, replenish capital, and offer a new loan for another project