Worked Example: SBA 504 Change of Ownership Hotel Feasibility Study in Virginia

This is a worked example, not a client engagement. It follows an illustrative purchase of an operating limited-service hotel on the overlap of Interstates 77 and 81 in Wythe County, Virginia, financed with an SBA 504 loan. The seller, buyer, brand and lender are all invented, and no brand is named. The market statistics, program rules and benchmarks are sourced, and every project number is either printed by the model behind this page or labeled as an assumption. The example shows how a purchase is sized when the seller's books set the price and the 504 rules set the loan, and how little room that leaves.

At a glance. A buyer would take over a franchised hotel that is already running and already renovated to brand standard, paying for the real estate with a senior bank loan and an SBA 504 debenture. The example passes both coverage tests, but only just, and names the single changes that would break it.

• Total project cost: $8,227,971
• SBA 504 request (bank first lien plus debenture): $5,793,116
• Sponsor equity (share of total project cost): 29.6%
• Stabilized net operating income available for debt service: $638,621
• Debt service coverage on stabilized earnings (lender minimum 1.25x): 1.28x
• Debt service coverage on historical earnings (program floor 1.25x): 1.28x
• Break-even occupancy at the binding minimum (base ADR): 54.0%

What a Feasibility Consultant Tests First on a Hotel Purchase

A lender reading a hotel acquisition asks one question before any other: can the earnings that justify the price carry the debt that pays for it? A feasibility consultant would answer that in a fixed order. The first test is what the seller's last fiscal year earned once it is restated on the cost structure the buyer inherits, meaning a replacement reserve, a management fee, the franchise fees and the property tax that follows the sale. The second test is what the hotel can earn when it is run at its stabilized level. The third is whether the program's own limits, rather than the earnings, decide how much can be borrowed.

In this example the third test decides. The price is not one the buyer chose: it is a capitalization rate applied to the seller's normalized net operating income, so it speaks to the seller's books. The request is then the smallest amount that the 504 structure, the seller's year and the sponsor's pro forma allow, rounded to $10,000 steps. Nothing in the loan was stretched to reach the price; the buyer's equity is whatever the 504 structure leaves unfinanced.

Two coverage tests apply, and the example runs both. The first is a program floor. On the program side, the SBA program page on this site sets the bar for a buyer of an existing business at 1.25x of past earnings ^[1], and that is the program floor here; the lender's own 1.25x, by contrast, is an assumption. The page also asks these buyers to show the floor on one past fiscal year or on two years averaged, and says a projection cannot meet it ^[2], except for qualifying special-purpose property, a category the page leaves undefined ^[3]. Nothing here assumes the hotel falls in that category, so the historical test stands. That page's general 504 statement is a lower number, with history or two-year projections allowed ^[4], and this example holds to the acquisition floor because the buyer takes over a going concern. That choice is a judgment about the site's page, not a reading of the procedure itself: the SOP was not read for this example, so everything said here about it rests on the site's own page.

The lender's test is separate. A lender would want at least 1.25x on stabilized earnings, and that figure is an assumption, since 13 CFR 120.150 sets no numeric coverage minimum ^[5]. The program floor and the assumed lender minimum both come to 1.25x, so the binding minimum is 1.25x whichever test is read, and the debt table prints that binding minimum on its own row (Table 9). Because the hotel needs no renovation, the stabilized year and the seller's year are the same year, and the two tests give the same coverage.

Decision. The request would be sized by the 504 split first and by coverage second, because the split is the tighter constraint, and it would present the result as a purchase fitted to the seller's books rather than as a comfortable pass.

The Hotel Market in Virginia and Southwest Virginia

Virginia is a large and growing state with a flat county at the center of this example. Census Vintage 2025 estimates put Virginia's resident population at 8,880,107 on July 1, 2025, up from 8,631,419 in the April 2020 estimates base ^[6]. The same vintage puts Wythe County at 27,983 residents, down from 28,292 ^[7]. This example reads that as lodging demand that rests on travelers passing through rather than on local growth. A county that loses residents cannot be the demand base for a 112-room hotel at an assumed 54.9 percent occupancy; the interstates have to be.

The visitor economy gives the state a deep base. The Virginia Tourism Corporation's 2025 study, prepared by Tourism Economics, reports 117.06 million visitors, of whom 46.55 million stayed overnight ^[8], and it puts their spending at $36.2 billion ^[9]. Visitor spending on lodging rose from $4.86 billion in 2021 to $6.80 billion in 2025, up 2.7 percent in the latest year ^[10]. Those statewide totals say lodging money is flowing into Virginia. They say nothing about whether any of it stops at one interchange in the southwest, and this example does not claim that it does.

What this case cannot cite. No Wythe County, Interstate 77 or Interstate 81 hotel occupancy, rate, supply or sale figure could be used. The local hotel statistics that exist for this market carry restrictions on republication, so they are not quoted, directly or by paraphrase, and no traffic count could be sourced. The hotel's performance here is therefore set at its chain scale's national level, not a local figure, and the case says so wherever it matters.

The chain scale supplies what the local market cannot. In its 2025 Form 10-K, Choice Hotels International gives results for its U.S. franchised hotels in the midscale and upper midscale tiers: for 2025 an average daily rate of $99.21 with occupancy of 54.9 percent and RevPAR of $54.50, and for 2024 $100.91, 55.9 percent and $56.41 ^[11]. The model takes that same occupancy and rate as the assumed level of the seller's last fiscal year, so its RevPAR prints at $54.47, a rounding difference from Choice's own $54.50 ^[11]. The direction of that chain scale in 2025 was down, and the example does not assume a recovery. HVS forecast national RevPAR growth of 4.5 percent for 2026 after a 0.3 percent decline in 2025 ^[12], and the base case takes none of that growth.

Operating costs are moving the wrong way. Apple Hospitality REIT reported continued upward pressure on hotel payroll in 2025 from a competitive labor market ^[13] and said it anticipated a similar operating expense environment in 2026 ^[14]. Virginia is not insulated from the cost side either. The Energy Information Administration puts the average price of electricity to commercial customers in Virginia at 11.14 cents per kilowatthour in August 2026, up from 9.85 cents in August 2025 ^[15]. A hotel that runs its rooms, laundry and corridors on commercial electricity feels that directly, and the utilities line in Table 7 is set from a ratio rather than from this hotel's bills.

Capital markets set the price. HVS wrote in July 2026 that a normal hotel cap rate for a stabilized or near-stabilized property remains near 8.0 to 8.5 percent, and that older limited-, select- and full-service hotels facing a big renovation will likely trade above that mark ^[16]. The example prices the hotel at the middle of the range, at an assumed 8.25 percent, and the reason is specific: this hotel is not the older hotel facing a renovation, because the seller has done the renovation. HVS, citing MSCI Real Capital Analytics, reported a national average of 8.2 percent for the twelve months to June 2026, with recent trades weighted toward upscale hotels ^[17], so the example does not price at the average.

Decision. The study would treat the national chain-scale figures as the market anchor for occupancy and rate, say plainly that no local hotel figure supports them, and carry that gap into the list of what would change the answer.

Supply and Public Comparables

A sourced comparison is the only supply evidence this example can offer, and it is a comparison of performance, not of competing buildings. The table below sets the public benchmarks the example uses side by side. Each is a published figure from a listed company or a trade analyst, and none of them is a competitor of the subject hotel.

The gap between the first and last rows is the lesson of the table. Apple Hospitality REIT, a public lodging REIT, ended 2025 owning 217 hotels with 29,583 guest rooms, nearly all under Marriott or Hilton flags ^[20]. Apple Hospitality REIT reported RevPAR of $117.90 for its hotels, against $118.54 in 2024 ^[19]. A portfolio of that kind sits in stronger demand markets than an interstate interchange in a county of 27,983 residents ^[7], and the subject hotel's assumed RevPAR is under half of it. The comparable is a source for cost ratios, where scale and brand affect the answer least, and it is not a source for the hotel's income.

On supply, the sourced evidence is about cost, not count. HVS's 2026 Hotel Development Cost Survey, which this example takes as an assumed benchmark for new-build cost, gives a median development cost per room of $170,000 to $197,000, for limited-service hotels and for midscale extended-stay ones ^[21]. This purchase costs $73,464 a room in all, as Table 5 shows. A new competitor recovering several times that cost per room would need rates this market has not been shown to bear, the only supply argument the facts allow. No supply pipeline could be cited.

Decision. The study would use the public benchmarks for context and for expense ratios only, and it would leave the question of local competition explicitly open.

Demand at the Interchange

Demand for this hotel is drive-by and long-haul demand. The subject sits where two interstates overlap, outside any town. A traveler arrives because the road puts a bed within a few minutes of the exit, and the other reasons to stop in the county, whether a destination, a corporate account or a school, are not documented in the sources this example may use. That makes the occupancy assumption an assumption about the road. The model takes the chain scale's 54.9 percent as an assumed occupancy, because an interstate interchange keeps its highway trade and because no local figure can be cited.

A second feature of demand is the lodging tax. The Weldon Cooper Center's table of Virginia local taxes lists Wythe County with a 5 percent transient occupancy tax on hotel and motel stays, and a 6 percent meals tax, and the page states no as-of date ^[22]. Guests pay the tax and the hotel only passes it on, so none of it counts as income. A memo line in the revenue table shows it, and the assumed average daily rate leaves it out. A town lodging tax could apply inside a town; this site is outside any town, so none is assumed.

Decision. The study would keep demand as a stated level of occupancy, defend it against the break-even table, and say that the level is a chain-scale figure and not a local one.

The Site

The assumed site is an interchange parcel on the overlap of Interstates 77 and 81 in Wythe County, outside any town, holding an interior-corridor hotel with a breakfast room, no restaurant. The model assumes 112 rooms. With no restaurant there is no kitchen payroll, and a buyer who wants an interstate position without a food operation chooses that format on purpose. That format also explains why other revenue is assumed at only 2.0 percent of rooms revenue: it comes from vending, pet and meeting-room charges, with no realistic parking fee at an interchange.

The site decides two costs. The first is the property tax. The Weldon Cooper Center's table lists Wythe County with 19,365 taxable real estate parcels and a nominal real property tax rate of 0.51 per $100 of assessed value as of July 1, 2025 ^[23]. The model applies that rate to the building-and-land portion of the price, taken as the assessment after the sale, and the result is the $33,557 shown in Table 4. The site is outside any town, so no town levy is added. The second cost is insurance and other fixed charges, which are assumed at $1,300 per room per year because no Virginia hotel insurance source could be found. That figure is a judgment, and Table 7 says so.

Decision. The study would treat the interchange as a highway business with a county tax rate, and would not credit the site with any local premium the facts do not support.

What the SBA 504 Rules Allow in a Hotel Purchase

The 504 program is built differently from 7(a), and the difference is what shapes this case. A 504 project is the purchase or lease, or the improvement or renovation, of long-term fixed assets by a small business for use in its operations ^[24]. The 504 piece is funded by a debenture that a certified development company sells, covering up to 40 percent of project cost and some administrative costs, and it sits behind the bank as a second lien on the property ^[25]. Whatever the debenture does not cover comes from a separate lender whose lien ranks first ^[26]. The debenture is limited to 40 percent of the whole project, and eligible administrative costs ride on top ^[27], and the dollar limit is $5,000,000 per borrower and affiliates outside the categories the regulation sets aside ^[28].

Two rules push the numbers. The bank, called the third-party lender in the regulation, must carry no less than half of total project cost if the borrower is a business of two years or less or if the asset has a limited or single purpose ^[29]. The sponsor's own cash is a second floor: 15 percent of project cost before administrative costs for a young business or a special-purpose building, rising to 20 percent where both are true ^[30]. The example takes the hotel to be a limited or single purpose asset, so the bank's share is 50 percent and the borrower's is 15 percent. That classification is the Agency's decision, not the model's, and it is the second open point listed at the end of the case.

The program also decides what is not financed. Under 13 CFR 120.884(d), 504 proceeds may not pay ancillary business expenses such as working capital, management services fees, organization costs, franchise fees and advertising ^[31]. A separate SBA statement excludes working capital and inventory from what a 504 loan can fund ^[32], while long-term machinery and equipment still qualifies if at least 10 years of life remain ^[33]. The example applies this to the furniture, fixtures and equipment bought with the hotel by leaving them outside the 504 project, which is a conservative reading because the sources do not say how the Agency treats hotel furnishings. Professional fees directly attributable and essential to a project, such as title insurance, appraisals, environmental studies and certain legal fees, are eligible project costs ^[34], so the combined closing line goes inside the project.

Program fees are financed. The SBA guarantee fee, the funding fee and the CDC processing fee are administrative costs that are not part of project costs but may be paid with the proceeds of the 504 loan and debenture ^[35]. Of those, the closing charge the development company takes can reach $10,000 ^[36], its processing charge is capped near 1.5 percent of net proceeds ^[37], and SBA itself takes a 0.5 percent guarantee charge, an annual charge of not more than 0.9375 percent of the unpaid balance and a funding charge of up to 0.25 percent ^[38]. The model reads the posted debenture rate as all in, so it adds no annual charge on top, and the underwriters' charge is an assumption, since no regulation here names a rate for it.

The job test is the part a hotel buyer should not overlook. Under 13 CFR 120.861 a 504 project must create or keep one job opportunity for each block of 504 funding, the size of the block being whatever SBA sets at the time ^[39]. A job opportunity is a full-time or equivalent permanent job created within two years of receipt of 504 funds, or retained in the community because of a 504 loan ^[40]. A Federal Register notice of September 30, 2025 fixes the ratio at $95,000 of SBA-guaranteed funding for each job opportunity ^[41], and it reaches every 504 loan approved from October 1, 2025 ^[42]. For this debenture the arithmetic is 25.5 job opportunities, as Table 5 prints. The hotel's staff count is not sourced, and the model has no payroll headcount, so whether the assumed hotel retains 25.5 full-time or equivalent jobs is untested here. The example does not guess; the CDC would test it, and the study treats it as open.

Rates are the last piece. A certified development company, SomerCor 504, Inc., posted 504 rates of 6.57 percent for a 25-year term, with 6.34 percent for manufacturing, food supply chain and rural-area projects, after the debenture pricing completed on November 5, 2026 ^[43]. SBA states that 504 loans are available with 10, 20 and 25 year maturities ^[44]. The example uses the standard 6.57 percent and takes the rural-area rate only as a sensitivity, because the sources do not establish that this site qualifies. The bank's first lien is priced off the Federal Reserve's H.15 release, which shows the 5-year Treasury constant maturity yield at 4.70, 4.74, 4.69, 4.59 and 4.64 percent on November 2 to 6, 2026 ^[45]. The model takes the last of those and adds an assumed spread of 3.00 percent for hotel risk.

Rounded to the dollar; lines may not foot by $1.

Decision. The study would size the request inside the 504 limits, flag the limited-purpose classification and the job test as the Agency's, and read the debenture rate as posted, not as forecast.

SBA Lending Record for This Asset Class in Virginia

Loan Analytics keeps a loan-outcomes dataset built from the SBA's own loan-level 7(a) and 504 files ^[80]. For this example's state and asset class it covers SBA loans approved in fiscal 2017 to 2026 to businesses coded to hotel and motel, with the project in Virginia. The figures are the SBA program's record in the state, not Loan Analytics' work and not this hypothetical project. The dataset notes a limit on the class: one code for hotels and motels; limited service and full service cannot be separated.

Purchase Cost, Sources and Uses: How the Hotel Is Paid For

The price comes from a stated basis. The seller's last fiscal year is the record, set in this example at the chain scale's assumed 54.9 percent occupancy and assumed $99.21 rate. The model restates it at the comparable's expense ratios and arrives at net operating income of $638,621. The purchase price is that income at the assumed 8.25 percent cap rate, or $7,740,855, which is $69,115 a room and 12.1 times the seller's income. Table 4 prints every step.

The uses are the price, the franchise relicensing fee, the closing and financing line and working capital, plus the 504 administrative costs. Choice Hotels International charges an initial franchise fee when a franchised hotel changes ownership ^[50], which its Form 10-K for 2022 calls a relicensing ^[51]. That report, the latest Choice annual report found with a fee table, quoted Comfort's relicensing fee at $750 a room with a $65,000 minimum, and Quality Inn's lower ^[54]. Comfort sits in the Choice chain scale the case uses ^[46], and the model takes the higher quote because no brand is named and the buyer pays it in cash: $84,000 for the assumed 112 rooms. Choice adds that its agreements are individually negotiated, so actual fees may differ ^[53]. Choice also requires property improvement plans, when necessary, of hotels entering its system, and may require them of hotels already in it at contractual windows ^[67]. This hotel has no such plan ahead of it in the example. Whether a brand asks for one at a transfer of ownership could not be sourced, and the case treats it as a diligence item.

The cost table follows. The real estate share is assumed at 85 percent of price, furniture, fixtures and equipment at an assumed 10 percent, and the remainder is going-concern value. The 504 project is the real estate plus the professional fees, and it is $6,739,727. The bank takes the minimum 50 percent of it, $3,370,000, rounded up to keep the share. The net debenture is $2,350,000, rounded down, and the gross debenture of $2,423,116 adds the administrative costs. The request is the bank lien plus the gross debenture, $5,793,116.

The equity is what the program leaves unfinanced. Inside the 504 project the borrower puts in $1,019,727, 15.1 percent of it. The costs the program cannot finance add $1,415,128: the furniture and equipment bought, the going-concern value, the franchise fee and the working capital. Together they make the sponsor's equity $2,434,855, a share of 29.6 percent, under an assumed ceiling of 35 percent. The loan is 70.4 percent of total project cost. The figure matters because a buyer who brings 29.6 percent has a different position from one who brings 47.1 percent, which is what the same hotel would need if financed under 7(a).

The equity convention for this study is equity at the supported loan. The study's own earnings support a loan of $5,802,259 within the 504 rules. Recomputing the administrative costs on that debenture gives $73,355, a total project cost of $8,228,209 at the supported loan, and equity of $2,425,950 there, or 29.5 percent. Those four figures belong together and are not mixed with the request's own total. The supported loan is a little larger than the request, which shows the request does not strain what the structure and the earnings can carry.

Virginia's SBA record for this class, which Table 3 sets out, puts the median 504 loan at $2,574,000, and this example's gross debenture sits in the same range. The cell does not define whether its loan size counts the debenture alone, so the comparison is a loose one, and the record says nothing about any lender or development company's view of this request.

Decision. The study would report the equity at the supported loan next to the request's total, and would not describe the request as conservative because the two are close.

The Pro Forma: Revenue and Operating Statement

The revenue build has three columns, and they are not three scenarios. The first is the seller's last fiscal year, which is the record. The second is the study's base case. The third is the sponsor's pro forma, which uses the market figures whole. Because the hotel needs no renovation, the first two columns are identical: the same occupancy, the same rate, the same other revenue.

Rooms revenue is $2,226,582 in every column, from 22,443 occupied room nights at the assumed rate. Other revenue is where the columns split. The study's base case assumes other revenue at 2.0 percent of rooms revenue, and the sponsor's pro forma uses the comparable's 5.34 percent. Apple Hospitality REIT reported revenue of $1,412,386 thousand for 2025, of which rooms were $1,278,423 thousand and other revenue $68,287 thousand ^[47], and that ratio is where the sponsor's number comes from. The portfolio has larger hotels with more outlets, and this hotel has none, which is why the study does not adopt the ratio. Total revenue is $2,271,114 in the base case and $2,345,515 in the sponsor's pro forma.

The operating statement applies the comparable's expense ratios. For 2025, Apple Hospitality REIT reports hotel operating expense of $847,322 thousand, built from operating, hotel administrative, sales and marketing, utilities, repair and maintenance, franchise and management lines, with property taxes, insurance and other as a further $89,732 thousand ^[48]. Apple Hospitality REIT's hotel operating expense was 60.0 percent of its total revenue in 2025, and property taxes, insurance and other were 6.4 percent ^[81]. The model computes each line as a share of total revenue from those figures, so the hotel's statement is the comparable's, scaled to the hotel's revenue. Only two lines are the hotel's own: property tax at the county rate on the post-sale assessment, and insurance per room, both described above.

The base case therefore runs EBITDA of $729,465, a margin of 32.1 percent, and net operating income of $638,621 after a replacement reserve of $90,845. The reserve is an assumed 4.0 percent of total revenue with no anchor beyond judgment. The sponsor's pro forma runs EBITDA of $789,372, a margin of 33.7 percent, and net operating income of $695,552. Two things explain the difference between the sponsor and the study: the sponsor carries other revenue at the comparable's ratio, so total revenue is $2,345,515 against $2,271,114, and the sponsor uses the comparable's ratio for property taxes, insurance and other, which comes to $149,016 against the study's $179,157. The study's own tax and insurance figures are the more specific ones, so the study keeps them.

The comparison table makes the issue with the comparable visible. Apple Hospitality REIT reported Adjusted Hotel EBITDA of $476,525 thousand for 2025, about 33.7 percent of revenue and down 6.5 percent from $509,544 thousand in 2024 ^[49]. The subject hotel's RevPAR is 46.2 percent of the comparable's, yet its assumed margin lands at 32.1 percent, close to the comparable's. That closeness is a product of the method, not a finding: every operating line is the comparable's ratio, so only tax, insurance and the other revenue ratio can move the margin. A hotel at a midscale rate is likely to carry administrative, utility and repair costs as a larger share of revenue, because they do not fall in proportion to rate. The 32.1 percent may therefore be generous, and this is the third open point.

Choice's annual report also gives a cross-check on one line. Choice states that its royalty fees typically run 5 to 6 percent of gross room revenues and its marketing and reservation fees 3 to 4 percent ^[82], and Choice reports a 5.14 percent average royalty rate across its U.S. system in 2025 ^[83]. The operating statement carries a franchise line and a sales and marketing line from the comparable's ratios, measured on total revenue, and a reader should compare the two lines together with Choice's rates before relying on either. A buyer pays the rates in the brand's own agreement.

Decision. The study would present the seller's year and the base case as one set of numbers, the sponsor's pro forma as the argument for upside, and would not size anything on the upside.

Coverage Under the Convention, Sensitivity and Break-Even

The debt table is where the case is decided. The bank lien carries a 7.64 percent rate, the 5-year Treasury plus an assumed spread, over 25 years of amortization, and the debenture carries the posted 6.57 percent over 25 years. Annual debt service is $302,540 on the bank lien and $197,606 on the debenture, $500,147 in all, a loan constant of 8.63 percent. Against the base case's net operating income of $638,621 that is a coverage of 1.28x on stabilized earnings and 1.28x on the seller's year.

Both tests pass. The lender's minimum of an assumed 1.25x is cleared by $13,437 of net operating income, and the same $13,437 clears the 1.25x program floor on historical earnings, a floor that comes from the site's own SBA page ^[1], so the binding minimum is 1.25x on both tests and neither floor binds ahead of the other. The sponsor's pro forma gives 1.39x. The seller's year would carry $510,896 of debt service at the program floor, and the sponsor's stabilized pro forma would carry $556,441 at the lender's minimum, so the lender's and the program's tests would allow a net debenture of $2,478,375. The 504 rules allow $2,358,904 of net debenture, and that is the smaller number, so the 504 rules bind before the coverage tests do. The request follows the rules, with the coverage tests as a check.

A cushion of $13,437 a year on net operating income of $638,621 is thin. The sensitivity table shows how thin.

Revenue down by an assumed 10 percent gives 1.11x, and down by an assumed 20 percent gives 0.95x. Occupancy five points lower gives 1.13x. Operating expenses higher by an assumed 10 percent give 0.97x, which is the worst single case on a modest move, and it deserves attention because the comparable's expense ratios are the least certain input in the model. A closing rate two points higher, with the loans still sized on the closing rates, gives 1.08x. The only column that improves on the base case is the rural-area debenture rate, 6.34 percent, which gives 1.29x if the site qualifies, and the example has not established that it does.

The break-even table converts the same facts into levels. Fixed charges of $179,157 do not move with revenue, and each dollar of rooms revenue contributes 0.37 to net operating income after the variable lines. At the base rate, occupancy of 45.6 percent gives 1.00x coverage, and 54.0 percent gives the binding minimum of 1.25x, against an assumed 54.9 percent in the base case. At the base occupancy, a rate of $82.41 gives 1.00x and $97.58 gives the binding minimum. RevPAR of $45.24 gives 1.00x and $53.57 gives the binding minimum. A rate decline of 1.6 percent takes coverage to the binding minimum, which is the shortest sentence in the case and the most important one.

Decision. The write-up would show a pass at 1.28x on both tests, list the four sensitivities that break the lender's minimum, and recommend that no one rely on the cushion.

What Would Change the Answer

Three things are open, and each is the Agency's or the seller's to settle, not the model's.

The job test. One job opportunity per $95,000 of SBA-guaranteed funding gives 25.5 job opportunities for this debenture. A change of ownership retains jobs rather than creating them, and a retained job counts, but only if it is a full-time or equivalent permanent job retained in the community because of the loan. The staff count of the hotel is not in any source available to this example. If the hotel runs on fewer permanent positions than the test asks, the CDC would have to find another route or a smaller debenture, and a smaller debenture would move equity up from 29.6 percent. The program rules set the split, so a shortfall in the debenture would not be made up by a larger bank loan without changing the structure.

Single purpose. The structure rests on the hotel being a limited or single purpose asset, which sets the bank's 50 percent and the borrower's 15 percent. If the Agency decides it is not, the contribution and the bank's share would both differ from the ones modelled, and the example does not model them. The point is that the structure's outcome depends on a classification the model assumes and does not decide.

The comparable's expense ratios. The base case's margin is the comparable's, and the comparable is a listed portfolio of larger hotels at a rate more than twice this hotel's. The seller's actual statements are the evidence that would replace the ratios, line by line, and the study would want three years of them. A seller whose administrative and repair lines run above the comparable's ratios would produce a lower income, and a lower income means a lower price at the same cap rate, not a rescue for the existing request. The sensitivity shows that costs 10 percent higher, assumed, take coverage to 0.97x.

Two further matters can move the answer. The first is the seller's books themselves. The seller's record in this example is not a real statement. It is an assumed year set at the chain scale's level, and the case rests on that. A real seller's year could be better, in which case the price would be higher at the same cap rate and the cushion would be the same, or worse, in which case there is no purchase to finance. The second is the rate at closing. Both loans are fixed at closing, and the sensitivity shows what a closing rate two points higher would do. The debenture rate is set at each monthly pricing, and the posted rate is one development company's posting.

The sponsor tried other structures before arriving at this one, and the concepts table records them. Each of the first five carried the brand renovation the seller has not done in this example, in some scope, and each was held to a loan the seller's year could carry at the floor. Under 7(a) the best of them needed 57.1 percent equity at the low end of the price, and the same concepts under 504 needed between 39.5 percent and 46.5 percent. The carried concept is the purchase of a hotel whose renovation is already done, under 504, which brings equity to 29.6 percent against an assumed cap of 35 percent. Of the concepts shown, it is the only one that fits under the cap. The same hotel under 7(a) would need 47.1 percent equity, which is the case for 504 in this example.

The base case passes both tests, so no restructure is needed, and the example does not offer one. If any of the open points comes out the wrong way, the answer changes in the order the sensitivity table shows: a rate shock or a revenue shortfall first, an expense surprise next.

Decision. The study would carry the example forward as a thin pass that depends on three confirmations, and would stop and re-size if any one of them failed.

Questions to Ask a Feasibility Study Company

How should a buyer choose a feasibility study company or consultant for a hotel purchase?

Ask what the report does with the seller's books, because that is where this kind of case succeeds or fails. A useful company restates the seller's last fiscal years on the buyer's cost structure and shows the history test beside the stabilized test, as this example does. Ask whether it sizes a 504 request from the 504 limits or from coverage alone, whether it names the classification and job-test questions as open instead of assuming them, and whether every market figure cites a primary source it is allowed to publish. A report that quotes local hotel statistics without saying who owns them should be questioned. A report that never says what breaks it should be questioned harder.

Does this hotel pass?

It passes both tests on the example's inputs, at 1.28x against a binding minimum that is 1.25x on the assumed lender test and on the program floor alike. The cushion is $13,437 of net operating income a year, and of the changes tested in the sensitivity table only the rural-area rate improves it.

Why does the 504 program fit better than 7(a) here?

The 504 structure finances the real estate with long fixed rates, a 6.57 percent debenture and a 7.64 percent bank lien, both over 25 years, and the loan constant is 8.63 percent. The concepts table shows that the same hotel under 7(a) would need 47.1 percent equity, against 29.6 percent under 504.

What does the 504 job test mean for a hotel?

The test asks for one job opportunity per $95,000 of SBA-guaranteed funding, which is 25.5 job opportunities here. Retained jobs count. The hotel's staff count is not sourced in this example, so the CDC would test it, and a buyer should ask for the headcount early ^[40].