Most small and mid-sized hotels and motels are bought with an SBA 504 loan, an SBA 7(a) loan, the two together, or a conventional commercial mortgage. Because most of the price is real estate, SBA can lend on that share over up to 25 years. Lenders size the loan on the hotel's operating cash flow, after a management fee and a reserve for replacing furniture and fixtures, and a branded hotel's purchase usually triggers a property improvement plan the buyer must fund. For a 504 loan the buyer's contribution is typically 15%, because SBA treats a hotel as special-purpose property.
- Usual routes
- SBA 504, SBA 7(a), 7(a) plus 504, or a conventional commercial mortgage
- Real estate term (SBA)
- Up to 25 years on the real estate share
- 504 buyer contribution
- Typically 15% for a special-purpose property such as a hotel
- What sizes the loan
- Net operating cash flow after management fee and replacement reserve
- Branded hotels
- The franchisor's property improvement plan is funded at closing
- SBA industry data
- Hotels and motels (NAICS 721110)
A real estate loan underwritten as a business
An office building leased to tenants for years earns predictable rent; a hotel re-leases every room every night. That makes a hotel an operating business that happens to sit on valuable land. Lenders like the collateral, which holds value far better than the equipment and goodwill behind most acquisitions, but they will not lend on the appraisal alone: the loan is sized on what the rooms actually produce.
That combination is why hotels are one of the most common uses of SBA's real estate lending. The SBA's own record of loans to this industry, including how many financed acquisitions, is on our SBA loans for hotels and motels page. SBA also looks at who the guests are: a hotel earns from transient guests, and a property renting most rooms to long-term residents starts to look like residential real estate, which SBA treats differently. Lenders will ask about the length-of-stay mix.
How a hotel earns, in the terms a lender uses
| Measure | What it is | What the lender reads from it |
|---|---|---|
| Occupancy | Rooms sold divided by rooms available | Demand, and how seasonal it is month by month |
| Average daily rate (ADR) | Room revenue divided by rooms sold | Pricing power against nearby competitors |
| RevPAR | Room revenue divided by rooms available | The single figure lenders compare with the local market |
| Channel mix | Direct, brand website, online travel agencies, groups | Commissions paid to online agencies thin the margin on each booking |
| Departmental profit | Rooms, food and beverage, other | Whether a restaurant or meeting space adds profit or only revenue |
| Franchise and loyalty fees | Royalty, marketing, reservation and loyalty charges | Costs that rise with revenue and come before profit |
| Replacement reserve | Money set aside each year for furniture, fixtures and equipment | Lenders deduct it even if the seller never funded one |
Many lenders also charge a management fee in their underwriting even when the owner runs the hotel, because a lender that ever has to step in will pay a management company to operate it. Together with the replacement reserve, that turns the seller's profit into the net operating cash flow the loan is sized on. Market benchmarking reports that compare the hotel's occupancy, rate and RevPAR with its competitive set are the lender's main cross-check; a hotel whose RevPAR trails its competitors has room to improve, but lenders finance what it earns, not what it might.
SBA requires debt service coverage of at least 1.15x today, and from 1 October 2026 a change of ownership must show 1.25x on historical results. Conventional bank lenders commonly look for at least 1.25x as well; see debt service coverage ratio.
Owner-operated motels and family labor
Many independent motels are run by a family that lives on site: the owners work the front desk overnight, a spouse handles housekeeping, a relative does maintenance. None of that labor appears on the payroll, so the P&L shows a margin a new owner cannot reproduce unless the new owner's household does the same work.
Lenders rebuild the numbers accordingly. They charge a market cost for the desk, housekeeping and maintenance the family provided, or a salary for the buyer if the buyer will do that work, and they add back only personal expenses the seller can document. In plain numbers: a motel showing profit of 500 with no payroll for the owners, less 180 of labor the family supplied, has 320 of cash flow to support debt, not 500. A buyer who plans to operate the same way should say so, and show the experience to back it; see buyer industry experience.
The price a seller quotes for a family-run motel is often built on the unpaid family's labor. The lender will price that labor back in.
The property improvement plan
When a branded hotel changes hands, the franchisor inspects it and issues a property improvement plan, or PIP: the renovations the new owner must complete to keep the flag, with deadlines. It can range from new signage and carpet to rebuilt bathrooms and a new lobby. The buyer may be signing a new franchise agreement at the same time, and the franchisor must approve the buyer.
- Get the PIP before the price is final. Its cost is part of what the buyer is really paying, and lenders size the loan on the total.
- Fund it in the sources and uses. Lenders usually hold PIP funds back at closing and release them as the work is done, so the renovation cannot be starved for cash in year one.
- Plan for disruption. Rooms out of service during renovation lower revenue while the new loan is being paid.
- Independents are not exempt. Without a franchisor, the lender relies on a property condition report, and deferred capital work shows up there instead.
Converting to a different brand, or dropping a flag to operate independently, changes the revenue case, and lenders will want to see the reasoning and what the brand change costs.
Choosing the structure
| Structure | How it works | Where it fits |
|---|---|---|
| SBA 504 | Typically 50% from a bank, with the buyer putting in 15% because a hotel is special-purpose property and the CDC covering the rest; the CDC's share goes up to $5 million | Real estate and long-life equipment; the business goodwill must be financed elsewhere |
| SBA 7(a) | One loan for real estate, furniture and fixtures, goodwill and working capital; up to $5 million, with 25 years on the real estate share | Smaller hotels, or where much of the price is not real estate |
| 7(a) plus 504 | 504 carries the property, 7(a) carries the business and PIP; since July 2026 the two programs' limits are counted separately | Larger hotels that exceed one program's limit |
| Conventional commercial mortgage | Bank or private lender, underwritten on the property's cash flow and appraisal | Larger hotels, experienced operators, or buyers who want no SBA program rules |
The purchase price allocation between land and building, furniture and fixtures, and goodwill does real work in an SBA deal. It sets the blended maturity, because the real estate share can run up to 25 years while goodwill runs up to 10; see SBA blended maturity and purchase price allocation. From 1 October 2026 change-of-ownership loans amortize over no more than 10 years except the real estate share, which makes the allocation matter more. It also decides whether SBA requires an independent business valuation: where the amount financed, less appraised real estate and equipment, exceeds $250,000, it does, alongside the real estate appraisal.
SBA's usual acquisition rules still apply to a 7(a) hotel purchase: at least 10% equity for a complete change of ownership, a seller note counting for up to half of it only on full standby for the life of the loan, no earnout, a seller who may consult for up to 12 months (24 from 1 October 2026) but not stay on as an owner, officer or employee, and a personal guarantee from every owner of 20% or more. The comparison is on SBA 7(a) vs 504 and SBA 504 vs a conventional commercial mortgage; for deals beyond the program limits, see acquisitions above the SBA limit.
The risks lenders price in a hotel
- Seasonality. A beach or ski-market hotel may earn most of its year in a few months; lenders look at monthly results and the cash needed to carry the slow season.
- New supply. A competing hotel opening nearby can take rate and occupancy for years.
- Demand drivers. A hotel that depends on one employer, hospital, university or highway exit carries that concentration.
- Property taxes and insurance. A sale can trigger a reassessment, and insurance on coastal or older properties can rise sharply; lenders underwrite the post-sale figures.
- Environmental and condition. Commercial real estate lenders require an environmental review and look for deferred maintenance in the roof, mechanical systems and life safety.
- Cash advances. SBA will not refinance an active merchant cash advance; see cash advances for hotels.
The documents a hotel lender asks for
The base is Transparent's SBA checklist, with the latest full year of the hotel's figures and the signed letter of intent. The hotel-specific items are what let a lender underwrite the rooms and the building.
- Business tax returns for 2–3 years, annual P&Ls and a year-to-date P&L through last month-end, a balance sheet, and monthly operating statements for the same period.
- Occupancy, ADR and RevPAR by month, and market benchmarking reports if the hotel subscribes to them.
- The franchise agreement, the PIP and the franchisor's transfer requirements, if branded.
- A property condition report or recent capital spending history, and the furniture, fixtures and equipment list.
- Property tax bills, insurance declarations, and any environmental reports on the property.
- The seller's debt schedule, with copies of loans being paid off.
- For each 20%+ owner: personal tax returns for 2–3 years, a personal financial statement, and a resume showing hotel operating experience.
How lenders treat real estate bought with an operating business is covered on business acquisition with real estate. Transparent's book of 1,800+ lenders includes 278 that write SBA 7(a) & 504 and 1,148 that write term & private credit, so a 504, a 7(a) and a conventional mortgage can be priced against each other on the same hotel. Once the documents are in, Transparent builds the full lender package in a day; what it contains is on the package.
Common questions
- How much down payment do I need to buy a hotel with an SBA loan?
- With a 7(a) loan for a complete change of ownership, at least 10% of total project costs. With a 504 loan, the buyer's contribution is typically 15%, because SBA treats a hotel as a special-purpose property, and 20% if the business is also new.
- Can the property improvement plan be financed?
- Yes. PIP costs are a normal use of acquisition proceeds under SBA and conventional loans. Lenders usually hold the funds back at closing and release them as the work is completed.
- Why does the lender deduct a management fee if I manage the hotel myself?
- Many lenders underwrite a hotel as if a management company ran it, because that is what they would pay if they ever had to take it over. It makes the cash flow comparable across hotels and owners.
- Does a motel run by the seller's family look more profitable than it is?
- Often. Unpaid family labor at the desk and in housekeeping lowers costs on paper. Lenders charge a market cost for that work, or a salary for the buyer who will do it, before sizing the loan.
- Can I use a 7(a) and a 504 loan together?
- Yes. A common structure puts the real estate in a 504 loan and the business, furniture and PIP in a 7(a). Since July 2026 the limits of the two programs are counted separately.