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Review of the USDA B&I hotel loan program

Plesae note that the information provided here are presented by Scientific Capital and are based on Scientific Capital's experiences in arranging these loans. You may contact the USDA offices to obtain direct information regarding specifics of this program.

Purpose: Acquisition, refinance, construction

For refinances, the loan can be used to consolidate existing loans and franchise PIPs and renovations, etc.

Eligibility: There are limitations
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%

Additionally, hotels need to be in the rural areas

Press to go to USDA webpage and see if your hotel is in the qualified area
Click to see if your hotel is in qualified USDA area

Tangible Equity for purchases: 20% to 25%
USDA loans require a proforma tangible equity of 20% to 25% for a hotel purchase depending on the state the hotel is located in.

Tangible Equity for Refinance: 10%
USDA loans require a proforma tangible equity of 10% for a hotel refinance for a hotel depending on the state the hotel is located in.

Rate: Variable and fixed
The index used is generally PRIME and the rates are either variable or fixed

Maximum Loan: 10 Million

Maturity: Full term
If the amortization is 25, the maturity is 25 and if the amortization is 30, the maturity is 30

Minimum Loan: 1 million

There is less appetite for our national lenders to fund smaller loans

Loan to Value: Up to 70% to 80%
Each state's USDA office sets the maximum loan to value based on its economy. In many states the maximum LTV for hotels is 80% but in some states it has been at 75%. In each case, we first check with the state's B&I office to get an update on the maximum LTV before starting the project

Debt Service Coverage Ratio (DSCR): 1.25

Reserves: None

USDA Guarantee fee: Varies with the loan amount
Loans of up to 5 million: 80% guarantee- Fee: 3 points on 80% of the loan
Loans of 5 to 7 million: 70% guarantee- Fee: 3 points on 70% of the loan
Loans from 7 to 10 million: 60% guarantee - Fee: 3 points on 60% of the loan

Example: on a 4 million loan, the guarantee fee is $4MM x 80% x 3% = $96,000

Amortization: 25 to 30 years
This amortization is what Scientific Capital can obtain through its national lending sources and not a representation of the program's amortization

Prepayment: 3 to 5 Years
The prepayment is generally declining 3 or declining 5 although there are different variations depending on the source we use. This prepayment penalty is not a representation of the program's prepayment and relates to what our sources offer

Points: Generally up to 1 point
Lenders either have no point or have up to 1 point on the loan

Costs: $11.5K to $20K on the average
The cost estimate includes the following items:
  • Lender processing fee: 1K to 4K
  • Appraisal and the review: 4K to 6K
  • Environmental Phase I report: 2K
  • Survey: 2K to 3K (Only if a copy is not available)
  • Lender legal fees: 2K to 4K  (only if lender uses outside closing attorney)
  • Misc such as credit reports, tax services, UCC search, etc.: $500 to 1K

Benefits of the USDA B&I loans for hotels

Maximum allocation per borrower/business: NONE
As opposed to SBA loans with 5 million allocation limit, B&I loans impose no limit and a B&I loan can be used by a hotelier any number of times to acquire or refinance any number of hotels

Sponsor: Investor as opposed to owner operator
Unlike the SBA loans that can be only be used by owner operator hoteliers, the B&I loan can be used for investment where a non-hotelier acquires a hotel and places a management firm to run it

Refinance of existing government loan: Yes
Can be used to finance other government guaranteed loans such as 7(a) and 504

Drawbacks of the USDA B&I loans

Citizenship: 51% US Citizens

Tangible Equity Requirement
Tangible equity is having less impact for a hotel purchase than refinance. In case a hotel has been owned by the same owner for a few years, the depreciation of the assets is so high that the equity of 10% requires high liquidity on the balance sheet to meet this loan requirement

Processing time frame: 75 days +
Since the USDA processes the loan separately and parallel to the bank, it takes longer to complete the financing compared to a bank loan

Cashout: Not possible
USDA loan proceeds can only be used for the borrowing business. The borrowers cannot cash-out from the hotel's equity for cases such as:
  • Inject equity in other investments
  • Pull cash out and hold
  • Payoff debts not incurred by the hotel
  • Pay off personal debts that are not incurred by the hotel - HELOCs and personal credit cards if used specifically for the business with proof of the use of funds maybe refinanced by 7a loan
However hotel may be refinanced to include PIPs (Property Improvement Plans), renovations, remodeling, acquisitions of FF&E, pay off and consolidate multiple loans including lease loans, credit cards, lines of credits, and others, buy out of other partners, transfer of ownerships, and other business related liabilities and expenses.

Our other popular hotel loan programs

Press to go to go to our CMBS hotel loan page Press to go to go to our SBA 7a hotel loan page Press to go to go to our SBA 504 hotel loan page
SBA (7a)
SBA 504
Press to go to go to our Bridge hotel loan page Press to go to go to our Conventional hotel loan page Press to go to go to our Construction hotel loan page

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