Hotel Feasibility Study for SBA, USDA and Bank Loans

A hotel feasibility study is an independent, third-party analysis of whether a specific lodging project at a specific site can achieve the occupancy, rate and operating margin needed to service a specific loan. It is distinct from an appraisal, which concludes a value, and from a brand's market study, which concludes whether a flag should be awarded. The feasibility study concludes whether the capital stack works.

No federal regulation makes the study automatic. Under 13 CFR 120.160(b), SBA may require a feasibility study, and the SOP 50 10 8.1 that took effect on October 1, 2026 leaves the decision with the lender or CDC. In practice, hotels are treated as special-use, single-purpose collateral, and lenders request a study for nearly every new construction, conversion, franchise change and acquisition without continuity of operations. USDA is more explicit: under 7 CFR 5001, a Business and Industry guaranteed loan above $1 million to a new business requires an independent feasibility study, and hotels, motels and bed and breakfast establishments are named as eligible uses. Conventional and CMBS lenders apply their own credit policies, which in hotel lending almost always include a third-party market and financial feasibility review before commitment.

The reader of the study is a credit officer, an SBA district office, a CDC loan committee or a USDA state office. The study is written for that reader, not for the borrower, and MMCG accepts no referral fees, contingent fees or financing arrangements that would compromise that position.

Four situations trigger a hotel study in nearly every file. The first is new construction, where no operating history exists and the lender must rely on projected demand. The second is a startup acquisition, including any purchase where the buyer will not continue the seller's operation, change the flag or close for a property improvement plan, since SOP 50 10 8.1 permits projections only where there is no continuity of operations or where the special-use property is fully secured by collateral. The third is a franchise conversion, where the brand's demand assumptions must be tested against the local competitive set rather than accepted from the franchise disclosure document. The fourth is any USDA B&I request above $1 million to a new business.

Acquisitions of operating hotels with continuity of operations follow a different path. SOP 50 10 8.1 Appendix 15 sets a 1.25 times historical debt service coverage floor for an Initial Acquisition, measured on the last fiscal year or a two-year average, and requires a Quality of Earnings report when the business purchase price reaches $3 million. In those files the feasibility study normalizes the trailing income for one-time demand, deferred capital and brand transition, and tests whether the historical coverage survives the normalization. The study does not replace the historical test; it explains it.

The study is written against a market that recovered on volume rather than rate. In 2025 the U.S. hotel industry ran 62.3 percent occupancy, a $160.54 average daily rate and $100.02 revenue per available room, with RevPAR slightly below the prior year. The August 2026 industry forecast calls for RevPAR growth of about 4.4 percent in 2026, with occupancy near 63.1 percent and rate growth near 3.1 percent. Growth in the upper midscale and midscale chain scales, where most SBA and USDA hotels sit, has come almost entirely from occupancy; rate growth in those segments has run near zero, and economy hotels have filled rooms by cutting rate.

Margins moved the other way. Across a large national sample, 2025 total revenue grew 2.6 percent while operating expenses grew about 3 percent, leaving a gross operating profit margin of 34.8 percent and an EBITDA margin of 22.8 percent. Only luxury and upper upscale hotels grew profit. Midscale hotels saw gross operating profit fall 5.7 percent while property taxes rose 12.3 percent. Labor cost per occupied room rose 2.9 percent and remains more than half of operated department expense. Insurance premiums fell about 5.3 percent in 2025 but remain roughly double their 2019 level.

Development cost has not retreated. The 2026 development cost survey puts the median all-in cost at $213,000 per room, with limited-service hotels in a range of about $170,000 to $197,000 per room, select-service near $200,000 and full-service near $467,000. The national building cost index rose 4.8 percent in the twelve months to mid-2026. The construction pipeline stood at 5,975 projects and 703,001 rooms in the second quarter of 2026, and conversions reached a record share of that pipeline. Lodging CMBS delinquency reached 5.84 percent in August 2026, which keeps conventional lenders cautious and keeps SBA and USDA programs central to small-hotel finance.

For SBA borrowers the program data reinforces the point. SBA 504 hotel approvals reached 368 in fiscal 2025, carrying about $1.0 billion in debentures and $2.7 billion in total project debt, an increase of about 80 percent in count since fiscal 2019. Fifty-six percent of those approvals were franchise units and a third were startups. Seasoned hotel charge-off rates in the 504 program run at roughly 2.5 percent on a count basis, against a program average near 1.5 percent, which is why hotel files draw more scrutiny than general-purpose real estate.

The study begins by defining the market area from the subject's actual catchment, not from a radius. For an interstate hotel that is the exit cluster and the next competitive exit in each direction; for a downtown boutique it is the walkable district and the event calendar; for a rural USDA hotel it is the county and the single generators that drive overnight stays.

Each demand generator is named and measured. Employment at the regional hospital, the distribution center or the university is taken from the employer, the state workforce agency or the institution's own filings. Industrial projects are measured by announced capital expenditure, peak construction headcount and permanent headcount, with the construction period dated. Tourism generators are measured by recorded visitation, lodging tax receipts and seasonality. Highway generators are measured by annual average daily traffic on the specific segment. The study then converts each generator to room nights using interview evidence, contract rooms and the published ratios appropriate to the generator type, so that the demand figure can be traced back to its source.

A generator that will end is treated as a generator that will end. A data center campus with 7,500 construction workers and 1,000 permanent jobs produces a demand curve that peaks and then falls, and the study models the fall rather than the peak.

Accommodated demand in the competitive set is divided into commercial, leisure, group, and government or contract segments, and each segment is projected on its own growth rate and penetration factor. Contract demand from construction crews, rail or airline crews and medical travelers is carried as its own segment with its own end date, because it carries its own risk.

Total market demand is accommodated demand plus latent demand. Latent demand has two parts: unaccommodated demand, meaning guests turned away on peak nights and documented from occupancy by day of week and month, and induced demand, meaning new room nights created by the subject's brand, product type or a new generator. Both are quantified from evidence. In well-supplied markets unaccommodated demand is a small adjustment, often one to three percent of base-year demand; a study that builds a project on latent demand alone is not a lender-grade study.

The competitive set is built from the hotels that actually compete for the subject's segments, verified property by property against each operator's own published inventory, brand, opening date, renovation history and amenity package. Announced, permitted and under-construction hotels are added with their expected opening dates, because a new hotel lowers every competitor's fair share from the day it opens.

Fair share is the subject's rooms divided by competitive-set rooms. Penetration is actual share divided by fair share. The study projects the subject's occupancy index, rate index and RevPAR index against the set, segment by segment, and reconciles those indices to the subject's product, location and brand distribution strength. Where a public municipal feasibility study or a published competitive-set history exists for the market, it is cited and reconciled; where it does not, the competitive-set performance is licensed and disclosed as licensed.

New hotels do not open at stabilized occupancy. Industry data on recent openings shows new-build hotels starting near 58 percent occupancy in the first month, with the rate index above 100 from opening and the RevPAR index reaching parity with the set at roughly seventeen months. Empirical testing supports a three-year build-up as the defensible default, with location and product type, rather than size or service level, determining whether a property stabilizes faster or slower.

MMCG projects a three-year ramp as the base case. For a branded upper midscale new build, the occupancy index typically runs in the 80s in year one, near parity in year two and at or above parity in year three, with the rate index at or above 100 throughout. The study states the ramp explicitly, year by year, so that the lender can see the coverage shortfall in year one and the reserve required to carry it.

Projections are prepared on a Uniform System of Accounts for the Lodging Industry basis. Rooms revenue is built from occupied room nights and segment-weighted rate. Departmental expenses, undistributed operating expenses, management fees, brand fees, property taxes, insurance and the furniture, fixtures and equipment reserve are each stated and supported.

Several conventions apply regardless of ownership. A base management fee of about 3 percent of total revenue is included even for owner-operators, because the lender underwrites a replaceable operator. Brand costs, including royalty, marketing, loyalty and reservation charges, are carried at the full contractual load, which for most midscale and upper midscale flags falls in a range of roughly 9 to 12 percent of rooms revenue. The FF&E reserve ramps to 4 percent of revenue at stabilization. Property taxes are computed from the local millage and assessment ratio rather than from the seller's bill, and insurance is quoted for the subject's construction type and location rather than carried at a national average. Labor is built from local wage evidence for housekeeping, front desk and maintenance.

Operating break-even for a limited-service hotel commonly falls in the high 30s to low 40s percent occupancy before debt service. That figure is rarely the binding constraint. Debt service is, which is why the study reports break-even both before and after debt service and reports the occupancy at which the program's coverage floor is first met.

For new construction the study presents a project cost estimate by line item: land, hard cost, FF&E, soft cost, financing cost and reserves, benchmarked against the current national cost survey and local permit and bid evidence. For conversions the property improvement plan is costed from the brand's published conversion range and the contractor's scope, and the study states which of those two the budget follows. For acquisitions the purchase price is tested against closed sales per key in comparable small markets, and any premium above the comparable range is identified as a demand premium that must be supported by trailing or projected income.

The capital stack is then stated by program. Under SBA 504 the borrower contribution is 10 percent for a standard project, 15 percent for a limited or single-purpose building or a business with two years or less of operation, and 20 percent where both conditions apply; hotels nearly always fall in the 15 or 20 percent tiers. The 504 job creation standard is $95,000 of debenture per job for a standard project. The combined SBA exposure limit across 7(a) and 504 is $10 million. Under USDA B&I, equity is 10 percent for an existing business and 20 to 25 percent for a new business or a construction project guaranteed before completion, with the guarantee at 85 percent for loans under $5 million and 80 percent from $5 million to $25 million at current fiscal-year terms.

The projection is run through the coverage test the program applies. For SBA acquisitions that is the 1.25 times historical floor under Appendix 15, or 1.15 times for a Business Expansion. For SBA new construction and USDA B&I the lender sets its own floor, commonly 1.25 times at stabilization, and USDA reviewers expect to see the year in which the floor is first met and the reserve that carries the project to that year.

Sensitivity analysis is presented as a table of outcomes, not as a narrative. Occupancy is stressed in five-point steps, rate in 5 percent steps, and operating cost in line with the current national expense growth, and the coverage ratio is reported at each step. Where the demand base includes a finite generator, a post-generator case is run with that generator removed. Where the market is drive-to and price-sensitive, a fuel-price case is run on leisure and weekend demand. The study concludes feasible, feasible with conditions, or not feasible, and states the condition in plain terms.

Limited-service and select-service hotels account for nearly all SBA and USDA hotel lending. They carry the highest gross operating profit margins in the industry, above 40 percent for well-run upper midscale properties, and the most predictable cost structures, which is why lenders prefer them. The study for these hotels turns on the competitive set, the ramp and the brand's distribution strength in the specific market.

Extended-stay hotels are the fastest-growing product in the SBA chain scales and now dominate new supply in upper midscale, midscale and economy. Extended-stay demand grew 2.2 percent in 2025 while total industry demand fell, and extended-stay occupancy ran about 12 percent above comparable hotels. The product carries a specific SBA eligibility issue: more than 50 percent of revenue must come from guests staying 30 days or less, and the study must project room nights and revenue separately for stays of one to six, seven to twenty-nine, and thirty or more nights. See the extended-stay hotel feasibility study page.

Economy hotels and roadside motels are acquisition targets more often than development targets. National economy occupancy rose in the first half of 2026 while economy rate fell about 9 percent, so a motel acquisition study must support rate as well as occupancy. Many of these files involve a flag change to a premium-economy conversion brand with a property improvement plan in the range of $18,000 to $35,000 per key. See the hotel acquisition, conversion and PIP feasibility study page.

Boutique and soft-brand hotels in small downtowns are financed under conventional debt or, where the project meets a public policy goal such as downtown revitalization, under SBA 504. Their feasibility turns on whether the hotel induces overnight stays rather than splitting existing demand, and on labor depth and winter softness in small markets.

Rural hotels financed under USDA B&I are a product type of their own. Their demand usually rests on one or two generators, public competitive-set data for towns under 50,000 does not exist and must be licensed, and seasonality can be extreme. See the USDA hotel feasibility study page.

SBA 7(a) is the program for most hotel acquisitions and smaller construction projects, with a $5 million cap, a guarantee of up to 85 percent, and the Appendix 15 coverage tests on acquisitions. SBA 504 is the program for larger new construction and owner-occupied acquisitions, with a fixed-rate debenture, a 25-year maturity where real estate is 51 percent or more of proceeds, and the special-purpose equity tiers described above. Both programs require that the hotel earn more than half of its revenue from transient guests, that the owner control the budget, capital expenditures, bank accounts and staff under any management agreement, that the manager not be affiliated with the franchisor, and that the brand be listed in the SBA Franchise Directory, where brands were required to re-certify by June 30, 2026. See the SBA hotel feasibility study page.

USDA Business and Industry guaranteed loans finance hotels in eligible rural areas, with loan limits to $25 million, an independent feasibility study required above $1 million to a new business, and a 3 percent upfront guarantee fee at current fiscal-year terms. Conventional bank and CMBS lenders underwrite hotels to a net operating income debt yield that currently runs about 15 to 17 percent for select-service and extended-stay collateral, which the study reports alongside the coverage ratio.

MMCG illustrates its hotel method through six model studies, each set in a real market with public evidence and written in the register of the study itself. The model studies are illustrative; the markets, generators, supply and performance data are real.

The first is an 86-room upper midscale new build in Monroe, Georgia, financed under SBA 504, where the subject opens into a competitive set absorbing 175 new rooms and the study must show that a three-year ramp survives a projected occupancy trough. The second is a 7(a) acquisition of a 76-room interstate economy motel in Rayville, Louisiana, where trailing income is inflated by a construction boom and the study must normalize it under the Appendix 15 historical test while confirming the 30-day revenue rule. The third is a USDA B&I extended-stay new build in Richland Parish, Louisiana, anchored by a $50 billion data center campus with 7,500 construction jobs and 1,000 permanent roles, where the study sizes the demand decline after construction rather than the peak. The fourth is a conversion of an aging motel to a premium-economy conversion brand in the Northeast Georgia mountain corridor, where the submarket runs 41.6 percent occupancy and the study must support the rate and occupancy lift from brand distribution rather than market growth. The fifth is a USDA B&I hotel at the gateway to New River Gorge National Park and Preserve in Fayetteville, West Virginia, where visitation reached a record 1.96 million in 2025 and the August peak runs more than six times the January trough. The sixth is a 70-key boutique hotel in downtown Clarkesville, Georgia, where the city's entire hotel tax base is a single five-room inn and the study must demonstrate induced overnight demand to support a 504 public policy loan.

The first case is written up in full on the SBA hotel page, the second and fourth summarized on the acquisition and PIP page, the third and fifth on the USDA hotel page, and the sixth below on this page in a later section.

A MMCG hotel feasibility study runs between 90 and 140 pages and includes the market area and demand generator analysis, demand segmentation and latent demand, the verified competitive set with property-level detail, the penetration and ramp projection, the USALI operating projection, the project cost estimate or acquisition analysis, the capital stack by program, the coverage and sensitivity tables, and a signed conclusion. Every competitor and every demand generator is verified directly against its own published source, and the study states which figures are primary-verified and which are carried from licensed or older sources.

Standard delivery is 9 to 16 business days from engagement and receipt of the project file. Expedited delivery from 5 business days is available. Fees begin at $4,900 for a single-site SBA 7(a) hotel study, and range from $7,500 to $18,000 for SBA 504 special-purpose hotel studies depending on project scale and the number of scenarios. USDA B&I and conventional hotel studies are quoted on scope. Payment is 50 percent at engagement and 50 percent at delivery. MMCG has offered a written acceptance guarantee on every study since founding: revisions required by the lender or agency are made at no additional cost.

The subject is a proposed 70-key upscale soft-brand hotel on a 2.37-acre site at the edge of the historic downtown of Clarkesville, Georgia, a city of about 2,000 residents in Habersham County, financed under SBA 504 on a downtown revitalization public policy basis. Total project cost is $14.0 million, or $200,000 per key before land, in line with the national select-service median. The city's hotel tax collections in the most recent reported year were $3,964 at a 5 percent rate, which confirms that the existing lodging base is a single five-room inn and that the subject would become the city's hotel tax base.

The competitive set comprises five upper midscale hotels totaling 390 rooms in the surrounding Northeast Georgia mountain corridor, which ran 61.6 percent occupancy and a $149.96 rate in 2024 and 60.9 percent and $142.48 through September 2025. Demand is 74 percent leisure, concentrated in the autumn event season, and only 41 percent of county visitors stay overnight. County visitor spending reached $69.6 million in 2024. The study segments the comp-set demand, identifies the autumn peak as the period of unaccommodated demand, and projects induced demand from the subject's rooftop bar, meeting space and brand distribution rather than from share taken from the set.

The projection stabilizes in the third full year at 63.9 percent occupancy and a $214.93 rate, a RevPAR of $137.25, with a rate premium of about 45 percent over the comp set supported by the subject's upscale positioning and the absence of any upscale product in the county. Weekday and winter softness, labor depth and day-trip leakage are stated as the project's weaknesses. Coverage first meets 1.25 times in the third operating year; the study specifies the interest reserve and the property tax incentive that carry the project through years one and two, and conditions the feasible conclusion on both. The in-city property tax burden is computed at about $14,300 per $1 million of market value from the county, school and city millage at Georgia's 40 percent assessment ratio.

The engagement is illustrative. The market, competitive set, performance history and cost evidence are drawn from the public December 2025 municipal feasibility study for the site and from the city's and state's published tax and visitation records.