Small Business Administration (SBA) loans remain the main route to capital for many first-time hotel buyers and for owners looking to finance mid-tier suburban properties, but securing these loans can be a long, arduous process if a borrower is unprepared. SBA loans require patience and preparation to obtain, says consultant and broker Ramin Mostaan, principal at Irvine, Calif.-based Scientific Capital Group. That’s because the extensive list of lending guidelines and government regulations that lenders have to follow for conventional loans gets supersized when they add SBA’s 400-page rule book to the borrower evaluation process.
“The package the lender prepares for the SBA has to be complete,” Mostaan says. “Not a single item can be missing because the lender has to explain why it’s not there.” Of particular concern to the SBA is the hotel’s ownership structure, says Craig Street, senior vice president and director of SBA lending for the Huntington National Bank of Columbus, Ohio, one of the biggest SBA lenders in the country. “With a conventional loan, if there are some minority partners, there might not be a lot of emphasis on who they are or what percentage they own,” he says. “With SBA loans, we need to know what percentages the borrowers own and have detailed information on the roles each minority partner plays in the business.”
Hosh Patel, president of Silver Star Properties Inc. of Steubenville, Ohio, has found SBA loans require paperwork and patience. Still, he believes the loans are worth the effort. He says he would not have been able to purchase his first hotel in 1999 without underwriting from the SBA. He had neither significant hotel experience nor a big down payment when he was looking to buy a Comfort Inn in Fairmont, W.Va., that had been foreclosed on. An SBA loan of $2.4 million allowed him to close the deal.
Since then, he financed two more hotels—a Super 8 and a Comfort Inn—through SBA loans, even though he was eligible for conventional financing. He went the SBA route in part because he’s familiar with the process and also because his lender likes the SBA’s loan guarantees, which can significantly reduce risks. He advises hoteliers interested in applying for SBA loans to find a lender that has specific experience in dealing with both the SBA and with the hotel industry.
Even then, hoteliers should be prepared to explain all the nuances of their business. “One thing that the bankers and the SBA don’t always realize is that branding would give you $10 more for the same room,” he says. “So we have to spell it out for the bankers and the SBA.”
Banks want to lend more than they’re currently lending, Street says, but can’t always find borrowers who demonstrate the intimate understanding of their financial data that’s necessary to secure these loans. “Our average hotel loan is probably in the ballpark of $1.5 million to $2 million, so for loans of that size, financial reporting off QuickBooks isn’t sufficient.”
Preparing detailed financial statements will boost hoteliers’ chances of being approved. “Some of my favorite borrowers and applicants recently provided to us a three-year history by month of their revenues. They had not only the revenues but also rooms sold in every one of those months. It could literally tell the story behind the ebbs and flows,” Street says. “I couldn’t wait to take that deal to our loan committee.”
Hoteliers not qualified for or interested in SBA loans may find conventional loans somewhat easier to secure than in the recent past, says David Sangree, president of Hotel and Leisure Advisors of Cleveland.
“Between 2010 and 2011, it seemed like only SBA loans were getting done,” he says. “In the last year or so, I would say the lending markets have loosened up and there’s more money now that is not necessarily SBA that’s available for both renovations and new construction.”