Worked Example: SBA 7(a) Hotel Feasibility Study in Arizona, a Closed Motor Inn Reopened as an Independent Lodge

This is a worked example, not a client engagement. It follows an invented sponsor who buys the land and buildings of a closed motor inn in Williams, Arizona, renovates every room, and reopens the property as an independent lodge on a single SBA 7(a) loan. No operating business is bought: the sale is real estate only, so there are no historical earnings to test, and the whole question rests on a projection. The example is useful to a lender because the projection comes in just under the lender's line, and it is useful to a borrower because it shows, with every dollar printed, what a smaller loan and more equity would do about it.

At a glance. A sponsor buys a closed motor inn, assumed at 180 rooms, on the Interstate 40 business loop in Williams, renovates it and reopens it unbranded, financed by the largest 7(a) loan the program allows. The study's base case covers debt service at less than the assumed lender minimum, which binds, so the example ends with a restructure that passes both tests. Two other shortfalls are stated plainly in the text: the price the cash flow can pay is below the example's own price floor, and the restructure's equity share is a hair over the equity cap.

• Total project cost: $7,256,407
• SBA 7(a) loan requested (75% guaranteed): $5,000,000
• Borrower equity: $2,256,407
• Equity share of total project cost: 31.1%
• Stabilized net operating income after reserve, study base case: $703,432
• Stabilized debt service coverage, study base case: 1.18x
• Occupancy needed for the 1.25x binding minimum: 55.1%

What a Feasibility Consultant Tests First

A lender looking at a closed motel asks four questions in a fixed order. Is there demand for a room that does not depend on the old owner's brand? What can a buyer pay for a building that earns nothing today? Does the renovated lodge cover its debt at a rate and occupancy the market has posted? And what happens if the first two years run short? A feasibility consultant tests them in that order, because a later answer cannot rescue an earlier one.

The answers here are mixed, and the example reports them as they came out. The study's base case covers debt service at 1.18x, against an assumed lender minimum of 1.25x. For a standard 7(a) loan the site's own SBA program page names a program floor of 1.15x ^[1], so the assumed lender minimum is the larger line and it binds; the base case clears the program floor and misses the binding minimum, as Table 12 prints. The sponsor's own pro forma, which uses the published market figures without the site's adjustments, covers 1.27x, just above the binding minimum; the example explains the small gap between the two columns.

Two statements belong at the top of the case, because a reader should not have to find them in a table. First, the residual purchase price is $7,801 a room, which sits $2,199 a room below the example's own $10,000-a-room price floor, as the cost table prints, a round judgement for the land and shell of a closed roadside motel. No concept the sponsor tried reaches that floor inside the program's limits, and the case carries the closest one rather than trimming the renovation scope to reach it. Second, the restructure that closes this case needs equity of 35.1 percent of project cost, which is 0.05 percentage points over the assumed 35 percent cap on sponsor equity; it passes both coverage tests, and it does not pass that cap, and the case says so rather than rounding the share down.

Decision. The study would carry the lower, site-estimate column into the loan sizing, not the sponsor's market figures, because the lender will underwrite the lower column, and it would report the price shortfall and the equity overage as findings.

The Market in Arizona and Along Interstate 40

Arizona is a growing state with a travel economy built on federal land. The Census Bureau's Vintage 2025 series counts 7,623,818 Arizonans on July 1, 2025, roughly 6.5 percent above the April 2020 base ^[2]. Coconino County, the county that holds Williams, did not share in that growth: the same estimates put it at 144,368 residents, about 0.5 percent lower than its 2020 base ^[3]. The county's lodging demand is therefore a visitor story, not a resident one.

The Federal Highway Administration reports 70,451 million vehicle-miles traveled in Arizona in 2024, of which 8,283 million were on rural interstates ^[4]. The case offers no traffic count for Interstate 40 at Williams, because the state transportation department's site refused automated requests. What it can say is where the interstate sits in the region: the National Park Service puts the drive from Interstate 40 at Williams to the Grand Canyon's South Entrance at about 60 minutes, and the drive from Flagstaff, also on Interstate 40, at about 90 minutes ^[5].

Williams has a place in road history that a lodge can use in its marketing. The National Park Service records that the last segment of Route 66 in the nation was bypassed by the interstate at Williams in 1984 ^[6], and the Service is commemorating the 100th anniversary of the route ^[7].

At the national level the lodging cycle is soft for the segment this lodge would join. CBRE described 2025 as K-shaped, with luxury and resort hotels seeing revenue and profit surges while economy and midscale hotels contracted significantly ^[8]. In CBRE's 2025 Trends sample, midscale hotels' property taxes rose 12.3 percent while their gross operating profit fell 5.7 percent and their EBITDA fell 8.7 percent ^[9]. CBRE's Q4 2025 Hotel Horizons forecast projected national RevPAR growth of 1.2 percent in 2026 and 1.7 percent in 2027 ^[10].

Supply and Public Comparables

No sourced count of rooms, new supply or pipeline for Coconino County or Williams turned up in the public material this example could reach. Arizona's tourism office, transportation department and revenue department all refused automated access, and the county and city records tried for this example stayed shut as well. A lender would want a local lodging census and a permit review; the absence of both is the largest gap in this case's evidence.

What the example does have is operating data that public companies file. Choice Hotels' 2025 Form 10-K reports operating performance for its U.S. franchised hotels by chain scale ^[11]. Choice labels its own scale in that table: midscale and upper midscale covers brands such as Comfort, Quality Inn and Sleep Inn, and economy covers Econo Lodge and Rodeway ^[12]. InnSuites Hospitality Trust, a small public owner-operator, holds two hotels, in Tucson, Arizona and Albuquerque, New Mexico, with 270 suites ^[13]. Both InnSuites hotels carry a national brand affiliation and pay for its reservation system ^[14], so neither is an unaffiliated independent, and the case uses their numbers as a bracket for the lodge, not as a twin.

Three readings follow. Choice's midscale hotels, the format a fully renovated lodge competes against, averaged an occupancy of 54.9 percent and an ADR of $99.21 in 2025, down from 55.9 percent and $100.91 in 2024 ^[15]; the case adopts the 2025 pair as its market figures, and its base case assumes the same $99.21 rate. Choice's economy tier ran 46.7 percent at $70.73 ^[16], and the example tests that tier as a what-if because an unbranded lodge in a weak year could be priced there. InnSuites reports that its Albuquerque hotel on the Interstate 40 corridor is most profitable in the summer high season, while its Tucson hotel peaks in winter ^[20], and the base case reflects that seasonality.

Table 10, in the pro forma, compares the lodge's margins and per-room costs with these filers line by line. InnSuites runs far higher occupancy than the lodge assumes, so the comparison is a bracket, not a match.

Demand: Who Fills the Rooms

Census Bureau estimates put Williams at 3,473 people on July 1, 2025, up from 3,206 at the April 2020 base, and a town that size is not where the lodge's guests come from ^[21]. Demand is travelers, and the largest traveler flow near the site is the Grand Canyon. The National Park Service's 2024 Visitor Spending Effects report puts Grand Canyon National Park at 4,919,163 recreation visits and $905,346 thousand of visitor spending in its gateway region in 2024, supporting 8,778 jobs ^[22]. The same report estimates that national park visitors spent $29.0 billion in local gateway regions in 2024 ^[23], and $11.1 billion of it on lodging in hotels, motels, bed and breakfasts and other specialty lodging, the largest share of their spending ^[24]. Applying the national lodging share to the Grand Canyon's spending gives the lodging pool printed in Table 2.

The lodge's rooms revenue at the market figures is 1.0 percent of that Grand Canyon lodging pool, by Table 2. That is the reason the example sits in Williams. An assumed 180-room lodge in a town of 3,473 ^[21] looks oversized until it is measured against the visitor spending that passes the interstate exit, and then it looks like a small claim on a large pool. The pool is a calculation, not a measured share of Williams.

The first sponsor concept sat in Holbrook, on the same interstate, near Petrified Forest National Park, and it died on demand. The Park Service reports 315,951 recreation visits to Petrified Forest in 2025, 43.5 percent fewer than in 2024, in a year the park was footnoted for partial or temporary closures ^[25]. The Painted Desert Visitor Center closed for construction in July 2025, and the park closed from October 1 through November 12 during the lapse in appropriations ^[26]. Even in 2024 the park drew 559,254 recreation visits and $43,357 thousand of gateway visitor spending ^[27], a lodging pool of $16,595,266 at the national share, of which a 40-room Holbrook lodge would need 4.8 percent (Table 2).

The Grand Canyon's own trend is a caution too. The Park Service reports 4,430,653 recreation visits in 2025, 9.9 percent fewer than in 2024 ^[28]. A lodge that leans on one park inherits its swings.

Decision. The study would size the lodge to the Grand Canyon corridor, not to Williams' residents, and would carry the 9.9 percent drop in 2025 visits ^[28] as a named risk rather than a footnote.

The Site: A Closed Motor Inn on the Business Loop

The site is a closed motor inn on the Interstate 40 business loop in Williams, in a town that sits about 60 minutes from the Grand Canyon's South Entrance ^[5]. The example assumes 180 guest rooms in an exterior-corridor layout. It is a recently closed property, not one abandoned for years: its roofs, plumbing and electrical service are assumed serviceable, so the building systems allowance is a modest assumed $5,000 a room, and a property condition report would replace that judgement before a lender relied on it. If the building turned out to be in the condition of a motel closed for a decade, the allowance would be many times larger, and the first Holbrook concept in Table 6 used $700,000 as an assumed figure for exactly that case.

Three rules of the building affect the budget whatever its condition. An asbestos inspection must precede any renovation ^[29], so the budget carries an assumed survey and abatement allowance of $40,000. When guest rooms are altered, the accessible-room requirements apply to the altered rooms until the property reaches the number required for new construction ^[30]. For a lodge of 151 to 200 rooms, the 2010 ADA Standards require at least eight guest rooms with mobility features, two of them with roll-in showers ^[31].

Arizona's taxes touch the lodge in two places. The state transaction privilege tax covers the business of operating a hotel or motel for occupancy by transients ^[32], where a transient is a person who obtains lodging space on a daily or weekly basis, or on any other basis for less than thirty consecutive days ^[33]. The state rate on that classification is 5.5 percent of the tax base, with county and city taxes levied on top and not stated here ^[34]. Guests pay that tax and the lodge passes it on, so it appears in Table 8 only as a memo line beneath revenue and never counts as income. Property tax is the second place: Arizona assesses class one commercial property at 15.5 percent of full cash value or limited valuation for 2026 and at 15 percent from and after December 31, 2026 ^[35].

Labor is the third. Arizona's minimum wage was $12 from January 1, 2020 and rises each January 1 with the cost of living ^[36]; the current figure could not be fetched, so maintenance payroll uses an assumed wage of $17.00 an hour.

The borrower would operate the lodge and occupy the whole building, so it is not the passive landlord that 13 CFR 120.110(c) makes ineligible ^[37], and it clears the rule that an existing building be at least half occupied by the borrower ^[38].

The SBA 7(a) Program Rules That Shape the Loan

The loan is a standard SBA 7(a) loan to a startup, not to an acquirer of a business, and that difference decides which coverage test applies. This site's own SBA program page holds Initial Acquisitions, Owner Buyouts and ESOPs to a separate, higher test on historical earnings ^[39], but this buyer takes over a shuttered motel with no earnings to test and no business changing hands, so that test does not reach the lodge. As a startup it falls under another line of the site's own page, quoted here as written: "Under SOP 50 10 8.1, standard 7(a) loans need at least 1.15x business coverage, and startups must reach it within two years of funding" ^[1]. No copy of the SOP was available for this example, so the floor rests on the site's own page and nothing further about the SOP is asserted.

The uses of proceeds fit the plan. Buying a standing building and then converting, expanding or renovating it is a permitted use under 13 CFR 120.120(a)(3) and (4) ^[40]. Land, site work such as parking lots and landscaping ^[41], and fixed assets such as furniture, fixtures and equipment ^[42] also qualify. Under 13 CFR 120.120(b), 7(a) proceeds may also fund inventory, supplies and working capital ^[43]. One loan can therefore buy the property, renovate it, furnish it and carry it through the ramp.

The size limit is the constraint that shapes the project. A single 7(a) loan tops out at $5,000,000 ^[44]; the request sits on that ceiling, which is why the project cannot simply be made larger. The guaranty is at most 75 percent for a loan of more than $150,000 ^[45]. The statute caps the guaranty fee at 3.5 percent of the guaranteed share on the largest loan tier ^[46]. The regulation words the same ceiling in 13 CFR 120.220(a)(1)(iii) and (iv) ^[47], and an additional 0.25 percent applies only to that portion of the guaranteed share more than $1,000,000 ^[48]. Proceeds can pay that fee, so the borrower does not bring it in cash ^[49]. On the guaranteed $3,750,000 the fee comes to $138,125, financed, as Table 5 prints. The fee notice for fiscal 2027 could not be fetched and may set a lower rate, so the example treats the ceiling as an assumed rate.

Terms and rate follow the same pattern. Under 13 CFR 120.212(c) no 7(a) loan runs past 25 years, although the share that buys or improves real property may add to those 25 years the time it takes to finish the work ^[50]. Other uses run ten years or less unless they finance real estate or long-lived equipment ^[51]. The model splits the loan accordingly: the property portion runs on a 25-year schedule and the furniture, equipment and working capital portion on a 10-year schedule (Table 12). Pricing floats over prime, which stood at 7.00 percent for the week of November 2 in 2026 ^[52], and on a loan above $350,000 the spread over the base rate is capped at 3.0 percentage points ^[53]. The example assumes the maximum spread, which gives a note rate of 10.00 percent and a loan constant of 11.95 percent.

The lender's credit rules do not set a number. Under 13 CFR 120.150, lenders may consider credit history, the applicant's earnings or cash flow, and equity or collateral, and the regulation sets no numeric coverage minimum ^[54]. A lender or SBA may ask for an appraisal, a survey or a feasibility study before it commits ^[55], and that is why a study of this kind exists.

Which minimum binds? The case sets the base coverage against two lines. One is the program floor of 1.15x as the site's own SBA program page states it ^[1]. The other is a lender minimum of 1.25x, an assumption the case states and not a program rule. Of the two, the assumed 1.25x is the larger, so it is the minimum that binds, and the debt table prints it on its own row. The practical effect is that the lodge can pass the program's floor and still fail its lender.

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

Decision. The study would size the request at the assumed lender minimum, not the program floor, and would test the two-year startup clock against the ramp table because the renovation consumes nine of the first twenty-four months.

SBA Lending Record for This Asset Class in Arizona

Loan Analytics keeps a loan-outcomes dataset built from the SBA's own loan-level 7(a) and 504 files ^[87]. 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 Arizona. 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.

What the Renovated Lodge Costs: Sources and Uses

The cost table prints the whole project. Total project cost is $7,256,407, or $40,313 a room, and the request is $5,000,000, with borrower equity of $2,256,407, which is 31.1 percent of the total (Table 5). The loan record that the SBA keeps for hotels and motels in Arizona, shown in Table 4, puts the request above the 75th percentile of 7(a) approvals for hotels and motels in the state.

The renovation lines are built from published cost guides, not from judgement. The Nehmer and HVS Design Hotel Cost Estimating Guide 2021 prices its economy-tier renovation on a prototype hotel of 90 guest rooms on three stories ^[56]. HVS puts an economy-tier guest room softgoods renovation at $2,261.12 to $3,276.74 per key, averaging $2,767.42 ^[57], and a full economy-tier guest room renovation adds $2,187.24 to $2,819.15 per key, averaging $2,522.61 ^[60]. HVS adds $3,819.08 to $5,332.44, averaging $4,549.36, for a full bathroom renovation ^[59]. For the site, HVS prices parking-lot renovation at $37,545 to $105,008, averaging $76,288 ^[62], and a full lobby renovation adds $25,529 to $33,510, averaging $29,142 ^[64].

The guide is from 2021, so the example carries its prices to 2026 with the Turner Building Cost Index growth that HVS reports year by year: 8.0 percent for 2022 and 6.0 percent for 2023 ^[65], then 3.9 percent for 2024, 4.1 percent for 2025 and 4.8 percent in the latest reading, the 2026 trailing-twelve-month period ^[66]. A 2021 price list left uncorrected would understate what the same work costs in 2026. Carried forward, they give the $1,919,233 renovation and $863,650 of furniture, fixtures and equipment in Table 5. The remaining lines are assumptions: systems, exterior and lobby allowances, an assumed 10 percent contingency, an assumed 8 percent for architecture, engineering and permits, closing costs, and working capital at an assumed $3,750 a room.

For scale, HVS's 2026 Hotel Development Cost Survey for the United States places the median cost of building a limited-service or midscale extended-stay hotel from the ground up between $170,000 and $197,000 a room ^[88]. At $40,313 a room, the renovated lodge costs about a fifth of a new build, which is the economic case for buying a shell. As a value check, HVS expects cap rates of 8.0 to 8.5 percent on hotels at or near stabilization ^[69]; at an assumed 8.25 percent, the central value of that range, the market-figure income is worth $9,235,427, and total cost is 78.6 percent of it. HVS qualifies the range in the same passage: "Economy, extended-stay hotels and luxury hotels will likely trend below this level, while older limited-, select-, and full-service hotels facing a big renovation will likely trend above this mark" ^[69]. A lodge reopened from a closed motor inn could be read as either kind, and because the rate here sizes no loan, this example keeps the central value.

How the purchase price was set

A closed motel has no earnings, and no sourced Arizona sale price could be found for this example: the Tucson, Maricopa County and Mesa records tried for it returned access denials or robots disallows. So the price is a residual: the most a buyer can pay once every other line is paid and the project yields what the market asks. HVS wrote in July 2026 that most hotel valuations reflect discount rates in the 10 to 11 percent range ^[68]; the example assumes the central 10.5 percent as the buyer's required yield on total cost, so total cost equals the market-figure net operating income divided by that yield, and the purchase price is whatever remains after the other lines. The yield sits above the cap rate because a renovation carries construction and ramp risk.

The residual rises with scale because the administrative and general, exterior, lobby, asbestos and closing lines are fixed. The sponsor therefore tried a ladder of concepts, in order, before anything was carried. The Holbrook concepts in Table 6 all fail: three give a negative price, which means no seller would accept a price below zero, and the economy refresh gives an income below its costs. The Williams concepts follow in Table 7.

The Williams ladder climbs from $2,016 a room at the smallest lodge to $8,456 a room at the largest, and none reaches $10,000. The 7(a) maximum caps the request from 180 rooms, and the 200-room concept needs 38.4 percent equity, which is over the assumed 35 percent cap, so the ladder stops there. The assumed 180-room concept is the closest inside the program's limits, and it is carried: a residual of $7,801 a room, the same $2,199 below the example's own $10,000 floor. Two ways of closing the gap were visible, a lighter bathroom scope and a smaller systems allowance, and neither was used, because each would be a cost line changed after the results. A price at the low end of the yield range would only lower the residual, and a 504 loan would change the fee and renovation interest but not the residual that income and yield set.

The price the cash flow can bear is probably below what an owner of an Interstate 40 motel site would accept, and a seller asking more would push equity up dollar for dollar. The price is a residual, not an observed sale. As a ceiling check, InnSuites puts the estimated market asking price of its two operating hotels at $28,000,000, a figure it says is not based on appraisals ^[85], which is $103,704 a suite and far above the closed motor inn's $40,313 a room all in.

Decision. The study would report the price as a residual with its shortfall against the floor, would require a real contract price before any commitment, and would treat any price above the residual as a dollar-for-dollar equity increase.

The Pro Forma: Revenue, Expenses and the Ramp

The revenue build is simple because the lodge sells only rooms. Table 8 prints both columns. The sponsor's column rests on Choice's midscale pair, 54.9 percent occupancy at an ADR of $99.21 that the base case also assumes, and gives a RevPAR of $54.47 and rooms revenue of $3,578,435 on 65,700 available room nights. The study's base case uses site estimates: an assumed stabilized occupancy of 54.0 percent and an assumed ADR of $99.21, which give a RevPAR of $53.57 and rooms revenue of $3,519,772. Other revenue is set at the InnSuites ratio: it reported about $210,000 of other revenue, mainly guest fees ^[76], against room revenues of about $7,254,000 ^[75], which is 2.9 percent of rooms revenue in both columns.

Why the two columns differ is the useful part. The case's central lesson is that two site estimates, and only two, separate the sponsor from the study. The first is occupancy: a new unbranded lodge has no brand reservation system or loyalty base and the corridor is seasonal, so the study assumes 54.0 percent against the market 54.9 percent. The second is utilities: the study assumes $1,600 a room against InnSuites' $1,474 per suite, because the lodge has one heating and cooling unit per exterior-corridor room and northern Arizona winters are cold. InnSuites reported utilities of about $398,000 for the year ^[71]. Together these two estimates take the study's net operating income below the sponsor's, as the two columns of Table 9 show.

The operating statement is anchored to InnSuites wherever the filing gives a line. InnSuites' room expenses, which cover property management, front office and housekeeping payroll and taxes, reservation fees and room supplies, were about $2,549,000 ^[74], so the rooms department in both columns runs at 35.1 percent of rooms revenue. An earlier version of this example used the lodge's own staffing build, which gave 28.6 percent with no anchor, and the comparable's ratio replaced it because a lodge at lower occupancy should not cost less per room dollar than the filer. The staffing build survives only as a memo row and a what-if. The other lines follow the filing. Sales and marketing was about $453,000 ^[78], repairs and maintenance about $428,000 ^[77], and real estate and personal property taxes, insurance and ground rent together about $602,000 ^[79], each divided by InnSuites' suites. InnSuites also names a standard 4 percent reserve for repair and renovation as a risk ^[70], and the example uses 4.0 percent of revenue as its replacement reserve in both columns. Maintenance payroll is the lodge's own: an assumed 112.5 hours a week at the assumed wage.

An unbranded lodge pays no franchise royalty, a cost Choice's average rate put at 5.14 percent in 2025 ^[73]. It pays booking commissions instead, and CBRE found agency commissions were the fastest-rising rooms department cost in 2024, up 6.0 percent ^[72]; they sit inside the rooms ratio, as InnSuites' reservation fees do.

The comparison table puts the lodge beside the public figures. The result is a base-case EBITDA margin of 23.4 percent against 22.8 percent for CBRE's sample, and CBRE's Trends sample of 2,216 hotels showed EBITDA margins falling from 23.3 to 22.8 percent of revenue between 2024 and 2025 ^[86]. The lodge sits above the sample because it pays no royalty and no separate management fee.

The ramp

A reopened, unbranded lodge has to rebuild its bookings first. The ramp table assumes 44.0 percent occupancy at an ADR of $88.00 in the first operating year and 50.0 percent at $92.00 in the second, then the stabilized pair in the third. The renovation takes an assumed nine months, so two years after funding the lodge has operated 15 months (Table 12); the startup clock that the site's SBA program page describes ^[1] therefore runs out on a lodge that is still ramping.

The ramp is the weakest part of the example. Net operating income covers debt service at 0.18x in the first operating year and 0.67x in the second, and cash flow after debt service is negative in both years. The pre-opening and working capital line is $675,000, which is meant to carry that gap, and the ramp's negative cash flows (Table 11) use all of it and more. The restructure below leaves this untouched; it changes the debt, not the ramp. A lender would want a larger working capital reserve or an interest-only ramp period; the case flags both for testing and adds neither to the numbers.

Decision. The study would underwrite the lower column, would show the sponsor's column beside it with the two reasons they differ, and would treat the ramp as a separate condition on the commitment.

Coverage Under the Convention and Sensitivity

Table 12 prints the debt service. On the $5,000,000 request, the real estate share of $3,939,799 amortizes over 25 years and the $1,060,201 equipment and working capital share over 10, which gives total annual debt service of $597,739. The sponsor's column covers 1.27x, which is $14,748 above the binding minimum. The study's base case covers 1.18x, which is $43,742 below it. Both columns clear the 1.15x program floor as the site's own SBA program page states it ^[1]. The lender minimum of 1.25x is an assumption, and it binds, so the base case fails the test that counts.

This example states equity at the supported loan, and the debt table prints it that way. The base case's income supports a loan of $4,707,282 at the binding minimum, and the request is $292,718 above that. At the supported loan, the guaranty fee recomputed on it is $129,892, total project cost is $7,237,197, and equity is $2,529,915. Those four figures belong together: the equity at the smaller loan is never set against the larger loan's project cost. At the program floor the income would support $5,116,611, which is above the request, and that is the sense in which the lodge passes the program and fails the lender. If the note were interest only, coverage would be 1.41x, which shows how much of the shortfall is amortization.

The sensitivity table shocks the stabilized base case one factor at a time.

Each shock falls below the program floor. Under the table's assumed shocks, a revenue decline of 10 percent gives 0.82x and a decline of 20 percent gives 0.46x. A two-point rate rise gives 1.03x, which a variable-rate 7(a) loan makes a live risk. An assumed expense rise of 10 percent gives 0.71x, and an assumed drop of 5 points in occupancy gives 0.84x. The thin cushion is a feature of the structure, not a fragile input: with income at the base case the request sits above what the income supports, and with any shock the lodge is below even the lower of the two minimums.

The break-even table converts the same arithmetic into the numbers an operator would watch.

Fixed operating costs are $1,446,007 a year, and each occupied room contributes $60.59 at the base rate. At the base ADR, the lodge breaks even on debt service at 51.3 percent occupancy, reaches the 1.15x floor at 53.6 percent, and reaches the assumed binding 1.25x at 55.1 percent. At the base occupancy, the rates are $94.33, $98.47 and $101.23. The net operating income needed for the binding minimum is $747,174, against $703,432 in the base case. The gap between the base case and the binding minimum is therefore about one point of occupancy or about two dollars of rate. That is small enough for a sponsor to argue and large enough that a lender holding to the assumed minimum will not approve the loan as presented.

Decision. The study would call the base case a miss of the binding minimum, would point to the 55.1 percent occupancy or $101.23 rate that closes it, and would leave every assumption where it is.

What Would Change the Answer

The what-if table changes one input at a time, from the base case, to show which lever moves the answer and which does not.

Occupancy at the market figure, with the site's utilities, covers 1.24x, just under the binding minimum: the occupancy gap alone nearly closes the case, but not quite. InnSuites Tucson's occupancy and rate cover 1.79x, which is the bracket's upper side and would need a branded, urban hotel's performance in a gateway town. Choice's economy occupancy and ADR give negative coverage, which is the lower side. Rooms costs at the earlier staffing build cover 1.56x, and that row is shown because replacing that build moved the case more than any market input did. It shows how far an unanchored cost estimate can swing a hotel's coverage.

Three conclusions follow. First, the answer is sensitive to occupancy and to the rooms ratio, and insensitive to what a promoter usually talks about, such as the Route 66 centennial. Second, a branded format would earn more per room but would pay royalties that the example does not model. Third, the price shortfall is a separate finding: no change in coverage fixes a residual price that sits below the floor, because income and yield set the price.

The restructure

The case ends with the restructure that the failing base case calls for. The sponsor cuts the 7(a) loan to the supported loan rounded down to $10,000, which is $4,700,000, and adds the difference as equity. Recomputed on the smaller loan, the guaranty fee is $129,688 and renovation interest is $176,250, which makes total project cost $7,236,719. Borrower equity is $2,536,719, which is $280,313 more than the original request implied, and 35.1 percent of project cost. Annual debt service is $561,875 and the base case's net operating income of $703,432 covers it at 1.25x, against the assumed lender minimum of 1.25x and the 1.15x floor, with $1,088 a year to spare. The restructure passes both tests.

It does not pass everything, and the case says where. The equity share is 0.05 percentage points over the assumed 35 percent cap on sponsor equity, so a sponsor who treats that cap as a hard limit would not bring it; a lender who sees $2,536,719 of cash in the project may regard it as a strength. The cushion of $1,088 a year is thin, and every sensitivity case in the earlier table falls below the minimum. The restructure also leaves the ramp and the price shortfall exactly where they were. It is the smallest change that makes the base case pass its tests, not a recommendation to proceed.

Decision. The study would present the restructure as the structure that passes, would label its equity overage and thin cushion, and would list the price contract, the condition report and the ramp reserve as conditions that remain.

Questions to Ask a Feasibility Study Company

Why does this example end with a failing base case?

Because the numbers did. The model prints the base case as computed, 1.18x against an assumed 1.25x, and the case explains the gap instead of adjusting an assumption until it passes.

What is the difference between the sponsor's pro forma and the study's base case?

The sponsor's pro forma uses published market figures at their central values; the study's base case replaces two of them with site estimates, an assumed lower occupancy and an assumed higher utility cost, each with a stated reason. Both are shown side by side in the revenue, operating and debt tables, and a lender sizes the loan on the lower one.

Does a motel with no earnings need a historical-earnings test?

No. The site's own SBA program page states the historical-earnings test for acquisitions of a business ^[39]. This sponsor buys the real estate of a closed motel and no operating business, so the case is a startup tested on projections against the 1.15x floor, as the site's page states it ^[1], and against the assumed lender minimum.

How should a borrower choose a feasibility study consultant or company?

Ask to see a sample whose base case is allowed to fail, and whose price, cost and revenue lines each carry a source or a labelled assumption. Ask who in the firm signs the study, what standard it is built to, and whether the firm will name a figure it could not source. Be wary of a company that offers a result before it has seen the site. A study that cannot say where its occupancy and rate come from is not one a lender can rely on.