SBA 7(a) in Hospitality

[Reid Smith]

Hey there, 

Under contract on a 16 room Motel and Restaurant.  Seller does not want to hold paper.  To my surprise, local banks are a bit disinterested in the Hospitality sector right now.  Pro Forma looks great, strong Financials for us as buyers and the property already has a commercial appraisal for over our purchase price.  We are funding a $300k rehab of the motel and will operate as STF and lease the stand alone restaurant.  Once stabilized(projected 3 years) we hoped to refi to get some of our $ back out. 
We have been offered an SBA 7(a) loan, and would love some feedback/pitfalls on SBA.  No experience with one. 

A local bank has offered us an SBA 7(a) loan at 75% LTV 8.25% 20year.

Another bank offered 60% at 7.75%, so we would be going back to seller to ask for 20% seller financing. 

Thanks so much for any insight!  

Reid

[Nick Belsky]

@Reid Smith

SBA loans can be wonderful products, but they can also be pitfalls.  Be sure to read all the details about the loan terms; rate type - is it fixed, floating, or variable; conditions of the note - what are you allowed and not allowed to do with the property; etc... SBA is like a conventional loan on steroids.  I've seen the UW get statements/docs from current tenants (your restaurant tenant in this case) to get a loan cleared to close.  The process can be very invasive not only to you but the seller.  

I've bailed a few borrowers out of floating rates on SBA in the past year. The rate was low then when increased, it became unmanageable for the borrower.  Refinancing into another SBA can be just as tough as well.  Overall, lots of work, but can be worth it especially if you can get higher leverages that traditional or private lending won't match.

Cheers!