SBA 504 Loan for Hotel Purchase: Complete Broker Guide

The SBA 504 loan is one of the most effective financing tools for hotel acquisitions, offering your borrower a low down payment, a long-term fixed rate on the CDC portion, and total project costs that can include renovation. For brokers, hotel 504 deals require careful packaging around owner-occupancy, franchise requirements, and business financials, but the payoff is a competitive loan structure that conventional programs often cannot match. This guide covers how the deal works, what lenders look for, and how to avoid the most common mistakes.

What Is an SBA 504 Loan?

The SBA 504 program is a federal loan program designed to help small businesses acquire real estate and major fixed assets. It uses a split structure: a conventional lender provides the first mortgage, a Certified Development Company (CDC) provides a second mortgage backed by an SBA-guaranteed debenture, and the borrower contributes an equity injection.

The CDC portion carries a long-term fixed rate, which is the main draw for borrowers. The conventional lender's portion typically carries a shorter term and may be fixed or variable. For a deeper overview of the full program, see Janover Pro's SBA 504 loan guide.

Why SBA 504 for Hotels?

Hotels are capital-intensive assets. Between the purchase price, brand-mandated renovations, and FF&E (furniture, fixtures, and equipment), a hotel acquisition can require significant upfront capital. The 504 program addresses this in three ways.

First, the equity injection is typically lower than what conventional lenders require for hospitality properties. Most conventional hotel loans ask for 25% to 35% down. The 504 program can reduce that to as low as 10% to 15% of the total project cost, depending on the deal.

Second, the fixed-rate CDC portion protects your borrower against rate volatility on a significant chunk of the financing. In a rising-rate environment, this is a meaningful advantage.

Third, renovation costs can be folded into the total project cost. If the hotel needs a PIP (Property Improvement Plan) or brand-standard upgrade, those costs can be financed rather than paid out of pocket.

Eligibility and Requirements for Hotel Properties

Not every hotel deal qualifies for SBA 504 financing. Here are the key requirements brokers need to verify before packaging the deal.

Owner-Occupancy

The SBA requires that the borrower's business occupy the property. For existing buildings, the threshold is generally 51% occupancy. For new construction, it is typically 60%. Hotels usually satisfy this requirement because the borrower operates the entire property as a single business. However, if there are third-party tenants (a separately operated restaurant or retail space, for example), the occupancy calculation gets more complicated.

SBA Size Standards

The borrower must qualify as a "small business" under SBA size standards. For hotels and motels (NAICS code 721110), the SBA sets size limits based on annual revenue. These limits are updated periodically, so always check the current SBA size standards table at sba.gov before packaging the deal.

Business and Personal Financials

Lenders and CDCs will underwrite both the business and the borrower's personal financials. Expect scrutiny on personal credit scores, personal liquidity, business tax returns, and a history of hotel management experience. For operators new to hospitality, some CDCs may require a management company with a track record.

Franchise Requirements

If the hotel operates under a franchise (Marriott, Hilton, IHG, Wyndham, Choice, Best Western, etc.), the franchise agreement must be reviewed. The SBA maintains a franchise directory of pre-approved franchises. If the brand is on the list, the review is straightforward. If not, the CDC will need to submit the franchise agreement for SBA approval, which adds time.

Environmental Review

Hotels typically require a Phase I Environmental Site Assessment, and sometimes a Phase II depending on the property's history. Properties with underground storage tanks, dry cleaning operations, or industrial neighbors may trigger additional environmental diligence. Budget extra time for this.

How the Deal Structure Works

The SBA 504 structure splits the total project cost across three sources.

The total project cost includes the purchase price, closing costs, eligible renovation costs, and certain soft costs. The CDC debenture is subject to SBA maximum amounts, which are adjusted periodically. For large hotel acquisitions, the conventional lender may need to provide a larger first mortgage to cover the balance above the CDC cap.

The first mortgage lender takes the senior position, which reduces their risk. The CDC takes a subordinate position, secured by the SBA guarantee. This structure gives the conventional lender comfort and often results in more competitive terms on the first mortgage than the borrower would get without the 504 backstop.

Fees and Costs

SBA 504 loans come with fees that brokers should account for when presenting the deal. These typically include a CDC processing fee, an SBA guarantee fee, and funding fees. Most of these can be financed into the loan. The conventional lender will also have its own origination fees and closing costs. Always present the all-in cost picture to your borrower so there are no surprises.

What Brokers Need to Know When Packaging These Deals

Hotel 504 deals are not plug-and-play. Here is what separates a deal that closes from one that stalls.

Lead with the Operating History

CDCs and conventional lenders care deeply about the property's operating performance and the borrower's hospitality experience. If your client is acquiring an existing hotel, present the trailing 12-month financials (T-12), occupancy rates, ADR (average daily rate), and RevPAR (revenue per available room). If historical performance is weak, be ready to explain the turnaround thesis with a credible business plan.

Use Janover Pro's DSCR calculator to show lenders where the deal stands on debt service coverage. A strong DSCR makes the rest of the conversation easier.

Identify the Right CDC

Not all CDCs are comfortable with hotel deals. Hospitality is considered a specialized property type, and some CDCs lack the underwriting expertise or appetite for these transactions. Work with a CDC that has closed hotel deals before. They will know the SBA requirements, process the paperwork faster, and be better positioned to advocate for the deal when questions come up.

Match the Conventional Lender

The first mortgage lender needs to be comfortable with both the 504 structure and the hospitality sector. Banks with SBA lending departments and experience in hotel financing are the best fit. Present the deal with a complete loan package: property financials, borrower resume, business plan, franchise information (if applicable), and a clear capital stack summary.

Anticipate the Timeline

SBA 504 loans take longer to close than conventional commercial loans. For hotel deals, expect 60 to 90 days minimum, and potentially longer if there are environmental issues, franchise approval delays, or complicated business structures. Set your borrower's expectations early, and build this timeline into the purchase agreement. Sellers who are not prepared for SBA timelines can kill a deal.

Common Pitfalls and How to Avoid Them

Underestimating the Equity Injection

While the standard equity injection is often quoted as 10%, hotel deals can require more. If the borrower is a startup operator, if the property is a special-purpose asset, or if there are risk factors the CDC flags, the injection can increase. Make sure your borrower has sufficient liquidity and that the source of funds is documented and seasoned.

Ignoring the Franchise Approval Process

For franchised hotels, the franchise agreement review adds time and complexity. If the franchise is not on the SBA's pre-approved list, start the approval process immediately. Waiting until the loan is otherwise ready to discover that the franchise needs separate SBA review is a common, avoidable delay.

Weak Business Plans

The SBA and CDCs expect a detailed business plan, particularly for borrowers acquiring their first hotel. A one-page summary is not sufficient. The plan should cover market analysis, competitive positioning, revenue projections with assumptions, staffing, and a capital improvement timeline if renovations are planned.

Not Accounting for FF&E and PIP Costs

Franchise hotels typically come with a Property Improvement Plan that the new owner must complete within a set timeframe. These costs can be substantial. If the PIP is not factored into the total project cost upfront, the borrower may face a capital shortfall after closing. Work with the franchise brand to get the PIP scope and cost estimate before submitting the loan package.

Environmental Surprises

Hotels, especially older ones, can have environmental issues that delay or derail the deal. Order the Phase I early in the process. If the Phase I identifies recognized environmental conditions, a Phase II may be required, adding weeks and costs to the timeline.

Frequently Asked Questions