Is your hotel property located in a rural or suburban community? If so, then your new development could be eligible for financing through the U.S. Department of Agriculture’s (USDA) Business and Industry (B&I) Guaranteed Loan Program.
The purpose of the B&I program is to enhance and expand economic growth opportunities available to business owners in rural communities. This is achieved by extending additional credit through guaranteed loans, which allows lenders more flexibility when offering terms and amounts to rural borrowers. Hotels are often ideal projects for this type of development financing depending upon location and other prerequisites.
To be eligible, a hotel borrower must have or propose a business that:
- Resides in a USDA eligible area – check property address here
- Positively impacts the local environment or economy;
- Produces new employment opportunities for local citizens;
- Focuses on and emphasizes water conservation; or
- Promotes the construction and use of renewable energy systems like solar.
Ideal hotel borrowers have previous and extensive hotel ownership experience, as well as FICO credit scores of 665 or higher. All owners, individuals or entities, with at least a 20% ownership stake in the hotel, must be personal guarantors with full recourse.
Terms & Fees
The following illustrates certain terms and fees for hotel borrowers that meet the B&I program criteria.
- The program leverages a blended amortization and maturity based upon the use of funds, which typically ranges from 22 to 28 years.
- Interest rates are usually very competitive in comparison to conventional rates and are typically tied to the Prime Rate.
- The guarantee structure is:
- 70% maximum for loans $5-10 million
- 60% maximum for loans over $10 million capping out at $25 million
- LTV is up to 80%, but usually in the range of 72-78% due to certain ineligible budget costs in the Tangible Balance Sheet Equity (TBSE) test.
- Standard fees are collected by the USDA, which is typically a guarantee fee of 3% and then a .25% renewal fee each subsequent year dependent on the outstanding guaranteed principle balance.
Most traditional banks and lenders don’t offer the USDA’s B&I program because of its unique process and standards. Unless you specialize in originating these loans, offering them can be more trouble than it’s worth for banks. Live Oak is one of the few that is committed to understanding and actively participating in this program for eligible hoteliers.
Also, the USDA lending process is frontloaded with more documentation and research than most other business loans. This makes the process more stringent at the beginning, but easier to close on the backend of the process if borrowers successfully survive the early gauntlet.
Live Oak is laser focused on innovation in financing and technology within niche industries like hotels. Therefore, we have streamlined the process as much as possible for borrowers looking to leverage the USDA B&I loan program. This translates to supreme confidence and transparency for our customers.
View our USDA Lending Process diagram.
Live Oak’s first step begins with project sizing and due diligence, which generally results in a project proposal letter to the borrower. From there, we support USDA environmental scoping, and order appraisal, IPR and Phase I. Next, our team completes the underwriting and submits a full application to the USDA.
The USDA’s first step starts with a pre-application review that hopefully results in pre-approval. Once Live Oak’s application is processed, the USDA oversees environmental scoping of the project site and any potential impacts due to development. They then submit a full application to an internal committee for further review. The goal of this phase of the process is to produce a conditional commitment from the USDA, which also triggers Live Oak to deliver a commitment letter to the borrower.
Meanwhile during this phase, you as the customer should provide both the lender and the USDA with full project details and a good faith deposit. The borrower will also concurrently support environmental scoping along with the lender. The borrower must obtain complete construction plans and provide any necessary support to the lender for the appraisal, IPR and Phase 1. Furthermore, any other required documents must be sent to the lender for underwriting. The result of this phase is an equity obligation by the borrower via an executed commitment letter.
Closing and Groundbreaking
Once Live Oak has delivered your commitment letter, we will begin completing our closing checklist and introduce our Construction Loan Department to the process. This specialized hotel construction team supports the USDA’s guarantee issuance process and helps you make plans with your contractor, architect, and any other construction vendors.
Meanwhile, the USDA will start processing Live Oak’s commitment and closing package with the end goal of a full guarantee issuance in mind.
At this point, you as the borrower should get:
- TBSE statements certified by your CPA;
- Continue to support Live Oak’s closing process with further required documents; and
- Continue to support the USDA’s guarantee issuance process.
Of course, our ultimate goal is loan closing, full guarantee and groundbreaking of your new hotel property!
We’re ready when you are…