Financing ground-up hotel development is one of the most challenging endeavors right now, with higher borrowing costs that don’t appear to be loosening anytime soon, as the Federal Reserve races to tamp down the economy through one of its most potent instruments: raising interest rates.
To get projects going, savvy investors have to look for other means to finance their projects beyond the traditional methods. One way is through a government-backed USDA loan.
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.”
USDA loan v. SBA loan
The USDA Business & Industry Loan Program is similar to the SBA 7a Loan Program, but with more benefits in regard to loan amounts, rates and terms. The table below highlights some key differences:
Here are the key differences:
| Loan Attribute | USDA | SBA |
| Maximum Loan Size | $25 million | $5 million |
| Minimum Loan Size | $2 Million | No Minimum, but commonly no less than $30,000 |
| Geographic Requirements | Rural America & U.S. Territories | No Restricted Geographic Area |
| Interest Rate Estimates | Wall Street Journal Prime + (1-3%) | SBA Prime Rate based Rate |
| Interest Rates | Lender Determined | Lender Determined |
| Origination Fees | 2% | Not Allowed |
Drawbacks of USDA Hotel Loans
Though USDA loans offer several benefits, eligibility requirements can be restrictive for some businesses, and the loan application process can be lengthy and complex. Additionally, the USDA may require borrowers to provide additional documentation and reports to ensure that the loan is being used for its intended purpose.
Other things to know about a USDA loan
- Given that the B&I loan program is a government guaranteed loan, the agency charges a 3% guarantee fee—or a 3% fee on the 80% of the loan.
- An annual renewal fee that’s charged to the borrower each year—50 basis points of the outstanding guaranteed portion.
- Typically, there are no prepayment penalties on these types of loans because they’re permanent long-term financing. The lender typically wants these to stay on the books.
In summary
USDA hotel loans can be a valuable financing option, especially in the current interest-rate environment, which makes it challenging to get new projects off the ground. These loans offer competitive rates and terms and support economic development in rural areas that are often underserved.
“Their fixed interest rates add predictability in a fluctuating interest environment, making them a strategic choice for hotel developers,” Cordell said.