WHAT IS A USDA LOAN ? A USDA loan , formally known as the USDA Business & Industry Guaranteed Loan Program ( B & I ), helps create jobs and stimulate economic development in rural America by providing financial backing for businesses , such as a hotel .
The program provides guarantees up to 80 % of a loan made by a commercial lender . This loan can then be used for acquiring land or property , constructing new buildings , renovating existing structures , purchasing equipment and refinancing existing debt .
The benefits are many , as Thomas Kimsey , president & CEO of Thomas USAF Group , which manages a portfolio of more than $ 100 million in loans annually , including the origination of USDA loans , points out . “ What I like to say is they provide access to capital for rural America and provide long-term permanent financing of up to 30 years on real estate , machinery , FF & E based on the useful life . It ’ s a permanent loan , fully amortized , no balloon payment . Those are the real benefits of it .”
And in this challenging debt environment , a USDA loan is eminently feasible . “ In this lending environment , most traditional lenders — whether large , regional or small — have pulled back and the USDA loan is one of the few products where the lender continues to lend because of that 80 % guarantee from the government ,” Kimsey said .
Added Sok Cordell , senior managing director at CH Capital Partners , a family-owned , boutique commercial mortgage banking firm , “ USDA loans present an advantageous financing avenue for hotel projects , especially in today ’ s high-interest-rate setting . Their competitive rates , extended terms and high LTV ratios offer substantial savings and improved cash flow management .”
WHO IS ELIGIBLE ? To be eligible for a USDA hotel loan , there are certain requirements that need to be met . First , the B & I program targets businesses located in rural areas with populations of 50,000 or less . The business must also demonstrate that it will create or retain jobs in the area and that it also has sufficient equity or collateral to support the loan , since these loans , unlike some others , are recourse loans that require a personal guarantee .
EQUITY REQUIREMENTS For existing businesses , a minimum of 10 % balance sheet equity is required at the time of issuing the loan note guarantee . For new businesses , 20 % balance sheet equity is required ( or 80 % loan to cost ). The loan limit is $ 25 million . “ As a rule of thumb again , anyone with 20 % or more ownership has to provide a corporate or personal guarantee ,” Kimsey said .
THE TERMS The interest rate is market driven and between the borrower and the lender . As Kimsey notes , most newly executed loans are variable , given the rate environment and the hope that rates will decline out on the horizon . On the other hand , as Kimsey said , somebody might want to lock in a fixed rate over worry that rates could go farther up .
FOR EXAMPLE ... Since a USDA loan is up to $ 25 million per project , it ’ s typically only one part of the capital stack to fund a hotel . Consider one project Kimsey and his team worked on , where the USDA loan was complemented with borrower equity and a C-PACE loan ( Commercial Property Assessed Clean Energy ), which is a loan through which commercial property owners can receive up-front financing for building upgrades or new construction that improves energy efficiency and resiliency . These loans are typically at a fixed rate and have terms for up to 30 years . The combination of this debt and equity filled out an $ 80-million capital stack for a hotel project .
“ When integrated into a capital stack alongside tools like C-PACE financing and New Market Tax Credits , [ USDA loans ] optimize financial leverage , reduce the reliance on higher-cost capital and potentially enhance project returns ,” said Cordell . “ In qualifying rural regions , they further align with USDA ’ s economic growth objectives , providing both funding and community goodwill .”
IN THIS LENDING ENVIRONMENT , MOST TRADITIONAL LENDERS — WHETHER LARGE , REGIONAL OR SMALL — HAVE PULLED BACK AND THE USDA LOAN IS ONE OF THE FEW PRODUCTS WHERE THE LENDER CONTINUES TO LEND
– THOMAS KIMSEY , PRESIDENT & CEO , THOMAS USAF GROUP
Nov / Dec 2023 hotelsmag . com 67