SBA Hotel Feasibility Study: 7(a) and 504 Under SOP 50 10 8.1

SBA 504 hotel approvals reached 368 in fiscal 2025, carrying about $1.0 billion in debentures and $2.7 billion in total project debt. The average hotel debenture was about $2.73 million, more than three times the program-wide median, and the count of hotel approvals has risen about 80 percent since fiscal 2019. Fifty-six percent of those approvals were franchise units, a third were startups with no operating history, and 17 percent were acquisitions with continuity of operations. Special-use property types as a group account for about 12 percent of 504 approvals but 21 percent of debenture dollars.

The risk profile explains the scrutiny. Seasoned hotel charge-off rates in the 504 program run at about 2.5 percent on a count basis, against a program average of about 1.5 percent. A hotel is a single-purpose building whose value depends on the business inside it, and when the business fails the collateral is worth what the next operator will pay. SBA's own rules treat it that way: the borrower contribution rises, the amortization lengthens, and the lender is expected to show demand and coverage evidence that general-purpose real estate does not require.

Four hotel-specific conditions appear in nearly every SBA hotel file, and the study documents each one.

The first is the transient revenue test. More than 50 percent of the hotel's revenue in the prior year must come from guests staying 30 days or less, and a startup must demonstrate the same in its projections. For a conventional limited-service hotel this is a formality. For an extended-stay hotel, or for any hotel in a market with contract crews, traveling medical staff or displaced residents, it is a live issue, and the study projects room nights and revenue by length-of-stay band so that the lender can confirm the threshold rather than assume it.

The second is the management agreement test. Where the hotel is operated under a management contract, the owner must approve the annual budget and capital expenditures, control the bank accounts and oversee employees. The study reviews the management agreement for those terms and states whether they are met.

The third is the franchisor affiliation rule. A hotel managed by a company affiliated with its franchisor is ineligible. The study identifies the manager and its ownership.

The fourth is the SBA Franchise Directory. The brand under which the hotel will operate must be listed, and brands were required to re-certify their listings by June 30, 2026. The study confirms the listing and notes any brand addenda the lender will need.

SOP 50 10 8.1 became effective on October 1, 2026 and applies to applications submitted to SBA on or after that date. For hotel borrowers the operative provisions are in Appendix 15, which governs business acquisitions, and in the 504 program changes.

Appendix 15 sorts acquisitions into four categories: Initial Acquisition, Business Expansion, Owner Buyout, and ESOP or Cooperative. An Initial Acquisition, an Owner Buyout and an ESOP transaction must show historical debt service coverage of at least 1.25 times; a Business Expansion must show at least 1.15 times. Coverage is measured on the last fiscal year or on a two-year average. Projections may replace history in only two situations: where the special-use property is fully secured by collateral, or where there is no continuity of operations and the loan is underwritten as a startup. A Quality of Earnings report is required when the business purchase price reaches $3 million, and advisory and agent fees may not be counted toward the borrower's equity injection. Where the acquisition includes owner-occupied special-use real estate whose value is substantially dependent on the business, the loan may carry a 25-year term.

On the 504 side, the minimum term requirement for the third-party lender was removed, and the 25-year debenture maturity now applies where real estate is 51 percent or more of proceeds, down from 75 percent. For hotel projects, which are almost entirely real estate, this makes the 25-year debenture the standard structure.

The combined SBA exposure limit across 7(a) and 504 rose to $10 million on July 4, 2026, which allows larger hotel projects to be financed with a 504 debenture alongside a 7(a) loan for working capital, franchise fees and FF&E.

SBA 7(a) finances hotel acquisitions and smaller construction projects up to $5 million, with a guarantee of up to 85 percent on loans of $150,000 or less and 75 percent above that. It is the program of choice where the project includes a large working capital, FF&E or franchise fee component, where the buyer is acquiring the business and the real estate together under Appendix 15, or where the project is too small to justify a debenture. Fiscal 2027 upfront guarantee fees are 2 percent on loans of $150,000 or less, 3 percent from $150,000 to $700,000, and 3.5 percent on the guaranteed portion up to $1 million plus 3.75 percent on the portion above $1 million for loans up to $5 million, with a 0.55 percent annual service fee. Fees are waived on loans of $700,000 or less to manufacturers, food producers and rural businesses.

SBA 504 finances owner-occupied real estate and heavy equipment through a fixed-rate debenture of up to $5 million, or $5.5 million for small manufacturers and energy public policy projects, paired with a third-party first mortgage of at least 50 percent of project cost. It is the program of choice for new construction and for larger acquisitions where the real estate dominates. Fiscal 2027 debenture fees are 0.50 percent upfront and 0.203 percent annually, and are waived for manufacturers, food producers and rural businesses.

For hotels the 504 borrower contribution is rarely the standard 10 percent. Under 13 CFR 120.910 the contribution is 15 percent for a limited or single-purpose building or for a business that has operated for two years or less, and 20 percent where both conditions apply. A new-build hotel by a new operating entity falls in the 20 percent tier. The 504 job creation standard is $95,000 of debenture per job for a standard project. An 86-room hotel with 25 to 30 full-time equivalent positions meets that standard only at debentures below about $2.7 million; at the $4 million to $5 million debentures typical of a new-build hotel, eligibility rests on a community development or public policy goal or on the CDC's portfolio average, and the study documents which applies.

The study is organized around the questions the lender, the CDC and the district office will ask.

For a new construction project the study establishes the market area and names and measures each demand generator; segments accommodated demand in the competitive set into commercial, leisure, group, and government or contract; quantifies unaccommodated and induced demand from evidence; verifies the competitive set property by property against each operator's own published inventory and adds announced and permitted supply with opening dates; projects the subject's occupancy, rate and RevPAR indices over a three-year ramp; builds a USALI operating projection with a 3 percent base management fee, the full brand fee load, local property tax and insurance, local wage evidence and a FF&E reserve ramping to 4 percent; presents a project cost estimate benchmarked to the current national survey, which places the limited-service median between about $170,000 and $197,000 per room; states the capital stack at the applicable equity tier; and reports coverage at each year of the ramp with occupancy, rate and expense sensitivities.

For a startup acquisition, including a flag change or a closure for a property improvement plan, the study follows the same structure, with the acquisition price tested against closed sales per key in comparable markets and the PIP costed from the brand's published range and the contractor's scope.

For an acquisition with continuity of operations the study normalizes the trailing income for one-time demand, deferred capital, owner compensation and brand transition, reconciles the normalized figure to the seller's financial statements and the Quality of Earnings report where one is required, and tests whether the Appendix 15 historical floor survives the normalization. In that file the study explains the history; it does not replace it.

In every file the study documents the four eligibility conditions, confirms the Franchise Directory listing, and states its conclusion as feasible, feasible with conditions, or not feasible, with the condition expressed in the lender's terms.

The study is prepared against a 2026 hotel market that recovered on occupancy rather than rate. The national market ran 62.3 percent occupancy and a $160.54 average rate in 2025, and the 2026 forecast calls for RevPAR growth near 4.4 percent. In the upper midscale and midscale chain scales, where SBA hotels concentrate, rate growth has been close to zero and gains have come from occupancy. Midscale gross operating profit fell 5.7 percent in 2025 as property taxes in that segment rose 12.3 percent. Well-run upper midscale limited-service hotels still report gross operating profit margins above 40 percent, but that margin must be built from the subject's own cost base, not assumed from a national average.

New supply in the SBA chain scales is weighted toward extended-stay product, and conversions reached a record share of the national pipeline in 2026. The practical consequence for an SBA borrower is that the competitive set is likely to gain rooms during the ramp, and the study must model that supply with its opening dates rather than hold the set constant.

An MMCG SBA hotel feasibility study runs between 90 and 140 pages and is delivered in 9 to 16 business days from engagement and receipt of the project file, or from 5 business days on an expedited basis. 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. Payment is 50 percent at engagement and 50 percent at delivery. MMCG accepts no referral fees, contingent fees or financing arrangements, and revisions required by the lender, CDC or SBA are made at no additional cost under MMCG's written acceptance guarantee.

The first SBA case is an 86-room premium limited-service new build in Monroe, Georgia, financed under SBA 504 at the 20 percent special-purpose and new-business equity tier. The subject opens in 2028 into a competitive set of six branded hotels totaling 556 rooms that ran 69.7 percent occupancy and a $155.54 rate in 2023, and that will absorb 175 new rooms in Covington and Bethlehem before the subject stabilizes. The study's central task is to show that a three-year ramp beginning at 61 percent occupancy survives a projected comp-set trough near 62 percent and reaches 1.25 times coverage before the interest reserve is exhausted. The full model study is on its own page.