Scientific Capita Group, Inc.- A National Hotel Finance Company- Hotel Rural USDA Business and Industry (B&I) loans

Home

About Us

Hotel Loan Programs

Capital Markets

Application Checklist

Hotel USDA Business & Industry (B&I)

SBA 7a

SBA 504

USDA B&I

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 Hotels
Hotels qualify if they do not include a golf course, casino, gambling facility, and racetrack. Ownership in the hotel by military or government employees need to be under 20%

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 hotel is located in a USDA rural zone - Check to see if your hotel is located in a qualified zone

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)

	Current Balance Sheet of the Hotel	Debts	Credits	Proforma balance sheet of the hotel after USDA loan is Funded
Assets: Accounts	60,000	55,000		5,000
Fixed Assets: Building & 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 & 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	250,000
Fixed Assets: Building & 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

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:
Requires lower injection than a conventional loan
Supports first time or investor (non-operator) buyers
Has no maximum life time limit (unlike the SBA 2MM limit)
Accommodates long-term investments with long-term maturity and amortizations with no balloons permitted
Applies to non-flag independent hotels/motels albeit with lower Loan to value

Major Disadvantages:
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.
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 During the Loan Process	# of Days	USDA Office Activities During the Loan Process

The lender Reviews the project and issues an Letter of Interest or LOI. Upon approval by the borrower, the bank starts the underwriting process	5-10
With the LOI signed off by the borrower, the bank sends USDA a pre-application for preliminary opinion on the project by the USDA	21-30	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. In development projects, the USDA office requests clearance from the State Clearing House for an opinion on the project's viability. Generally States take about 40 to 60 days to respond with their opinion.
The lender will proceed with the underwriting and orders the third party reports. Generally, it takes three to four weeks to obtain the reports. Meanwhile, the lender continues underwriting the loan.
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
Upon completion of the underwriting, the loan is presented to the loan committee for approval. Once the loan is approved, the commitment letter along with the appraisal and environmental reports are sent to the USDA office.	3-7
	15-30	USDA regional officer performs a site visit of the hotel and interviews the buyer and the hotel management team
	15-30	In some states, the USDA office request clearance for the environmental report which may take 7 to 10 days
	6	Upon approval, the USDA obligates the loan. There is a 6 day wait period before the conditional commitment is issued to the lender. On loans larger than 7 million in size, the State USDA office has to request for approval from the Washington USDA office which adds additional 10 to30 days to the loan process which is not reflected here.
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	3-5
		If the funds for the USDA fiscal year has not depleted, the USDA issues preparedness for the guarantee to the lender, otherwise, the closing of the loan will be on hold until the USDA budget is approved with additional funds and the gurantee for the loan is possible
Upon receiving the guarantee preparedness notice from the USDA, the lender closes the loan.
	53-88
At this point the loan is funded and closed. The remaining steps below are post closing. The total expected timeframe to close then is at the minimum 53 days and probably not longer than 88 days - Please keep in mind that this is assuming that the loan is under 7 million so it does not have to be sent to Washington DC's USDA office for approval. Generally, it is improbably to have a USDA hotel loan taking less than 60 days.
The lender obtains from the borrower, a CPA prepared GAAP compliant balance sheet which shows sufficient tangible equity in the borrowing company.	3-5
	3-10	Upon verification of sufficient tangible equity, the USDA issues the guarantee to the lender