There’s a lot to think about when buying commercial real estate for a hotel, and financing your purchase is one of the biggest questions you will face. While many prospective hoteliers know about the 7(a) loan program offered by the Small Business Administration, not everyone knows that there is another option that might be even more attractive: the 504 loan.
7(a) vs 504 Loans: The Key Differences
Many prospective hotel owners are aware that SBA financing is available to them, but have only heard about the 7(a) loan program. This is a loan designed for (although not limited to) business acquisitions, working capital, and inventory and is arranged through a commercial bank. Meanwhile, the 504 loan is better suited for commercial real estate financing, including building acquisitions and renovations.
The SBA 504 loan offers important advantages for borrowers specifically looking for hospitality properties. With a Certified Development Corporation (CDC) like TMC Financing teaming up with a commercial bank to provide a 504 loan, there are more options for financing with more favorable conditions, including a long-term fixed rate and up to 85% financing with no additional collateral required.[/vc_column_text]
| SBA 7(a) loan | SBA 504 loan | |
| Use | Purchase or improvement of land or buildings, construction, purchase of equipment/furnishings, with the inclusion of working capital and inventory | Purchase or improvement of land or buildings, construction, purchase of equipment/furnishings |
| Loan Amount | $5 million maximum | No maximum on total loan amount. The SBA portion cannot exceed $5 million or $5.5 million on projects with energy efficiencies implemented. |
| Collateral | Assets acquired + personal property | Assets acquired |
| Terms | 10 – 25 years | 10 or 20 years |
| Rates | Negotiable, predominantly variable | Fixed, below-market rates |
| Down payment | Negotiable, starting at 15% | 15% |
| Fees | Paid out of pocket; usually 2.75% | Included in the SBA Loan; approximately 2.15% |
Possibly the best feature of the 504 compared to the 7(a) loan is the difference with the interest rate. The 504 loan offers a below market rate, fixed for 20 years, while the 7(a) interest rate is variable and unpredictable.
An additional advantage comes with energy efficiency: Meeting the goal of reducing energy consumption by 10% or using 10% renewable energy brings the huge advantage of allowing the borrower to initiate an unlimited number of new projects.
California Hoteliers Praise the SBA 504 Loan Program
TMC client and hotelier Jay Desai used a 504 loan to acquire and renovate the historic Sonora Inn, as well as the Rodeway Inn motel across the street from it. He then went on to acquire the Sands Motel in San Pablo, also using 504 loan financing through TMC.
“The SBA 504 program makes sense for our approach,” Desai said. “SBA 7(a) financing is limited to $5 million and if you own multiple properties, that doesn’t go very far. If you use the 504 program and go green by installing solar and the like, it doesn’t count against your eligibility.”
Another TMC client, Shailendra “Sam” Devdhara, noted that it pays to look into the 504 option. He has financed motels in San Francisco, Livermore and Santa Clara with TMC. “Because the SBA 504 program is available, independent hotel owners can get into the business with a smaller outlay of capital,” he said. “That allows us to make improvements on older properties and upgrade a community’s accommodation offerings. Not only do our solar panels save energy, but they help in marketing the hotels. Guests like the idea of going green.”
Is the 504 Loan the Right Choice for You?
Qualifying for a 504 loan isn’t as exclusive as you might imagine. In fact, most businesses in the U.S. qualify for the 504 loan, as long as they meet a few simple guidelines as a privately-owned business which operates for profit.
Regardless of where you are in the process—whether you have a building picked out or are just hearing about this option for the first time—TMC Financing can help guide you through the next steps, from the prequalification process through the duration of your ten or twenty year loan.
If you are thinking about buying or building a hotel or motel in California or Nevada, you may want to talk to one of our local 504 loan experts. We can prequalify you for a 504 loan and provide consultation to help you get the best outcome for your project.