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Financing Hotel Property Improvement Plans (PIP) Using an SBA Loan

In today’s dynamic hospitality marketplace, both new and experienced hoteliers are looking to acquire and improve existing hotels.  If you’re buying a flagged property, the transaction often requires a Property Improvement Plan (PIP).  Whether flagged or independent, purchasing an established property can be a great opportunity to maximize capital and avoid the financial uncertainty of new construction.  The transfer of ownership is the ideal time to infuse new energy into a property.  Many of the national chains add a PIP as a contingency of the sale in order to ensure the property is brought up to current brand standards. 

As with any commercial building, regular updates are vital to a hotel’s continued success.  SBA loans are often utilized to finance a PIP and it is important to understand the types of improvements a prospective hotel owner can make using SBA funds. Experienced hotel owners often focus on the following areas: 

  • Renovations to exterior facades – including signage, roofing, and colors
  • Room and lobby updates such as lighting and fixtures
  • New amenities such as indoor/outdoor pools and fitness areas
  • Expand or improve parking

There are many options and various structures offered through the SBA loan programs.  Hotel owners often utilize the 7(a) loan program to fund their hotel PIP as part of a larger hotel acquisition loan.  This SBA offering is great solution to finance a PIP as the necessary funds can be structured via the following parameters: 

  • Above average LTV ratios and low down payment options
  • Loan terms up to 25 years – improving cash flow and freeing up capital
  • Fully amortizing – no balloon payments!
  • Ability to pre-pay up to 25% per year without penalty, and no pre-payment penalty after 3 years
  • Loan amounts available up to $5,000,000
  • Maximum interest rate of 2.75% + the WSJ Prime Rate Index

In addition to including a PIP with a larger acquisition loan, the SBA program can be employed to finance a PIP for a property already in your portfolio.  Whether as a separate loan or in conjunction with a refinance, the SBA 7(a) program is exceptionally suited to these types of projects.

There are potential pitfalls to look out for when embarking on any new project.  This is especially true on projects as large and complex as a hotel performance improvement plan. As you work with your franchisor and lender to negotiate the transaction, be mindful of the following:

  • Focus on key upgrades necessary for your hotel to attract customers
  • Be sure to consider items that may be ok now, but are close to end of life – such as the roof or heating system
  • Review the PIP with a qualified professional to ensure you create a plan that meets the hotel chain requirements and is achievable by your team!

A conversation with a knowledgeable SBA-approved lender that has industry expertise will be helpful in deciding if using SBA financing to fund a PIP is right for you and your hotel’s future. At Northeast Bank, our SBA lending division has strong experience deploying funds for hotel acquisitions and refinances via the SBA 7(a) loan program.  We have numerous examples where a PIP is included in the transaction and understand the SBA program requirements necessary to ensure the loan is properly structured. 

Want to learn more? Visit https://www.northeastbank.com/hotels to read about our 30-plus years of experience in financing hotel projects like yours. 

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