Hotel Feasibility Study in Minnesota

Small hotels, financed through SBA 504

Minnesota's hotel loans are small for the class. The Minnesota median was $869,500, only 0.40x the hotel median nationwide, and on our screen that size is distinct, sitting apart by more than our margin from Minnesota lending in every class and from hotels across the country. Minnesota's middle half of hotel loans spans $351,000 to $1.7 million, sums that rarely build a new branded hotel, which points to motels, resorts, smaller properties and renovations. Hotels are underweight here: a location quotient of 0.55x, a rank of 8 of 39 among Minnesota classes and a rank of 21 of 53 states, on 182 approvals worth $227.3 million from FY2017 to FY2026.

Minnesota's program mix is the other surprise. SBA 504 carried 101 Minnesota hotel approvals and SBA 7(a) only 81, so most of these owners financed real estate through a development company. Midwest Business Finance Corporation holds 45 of those loans, worth $54.8 million; Amplio Economic Development Corporation holds 21, Twin Cities-Metro Certified Development Company 16 worth $30.2 million, Southeastern Minnesota 504 Development Corporation 8 and Dakota Business Finance 5. The 7(a) side is thin and local: GBank holds 6 worth $15.8 million, Northeast Entrepreneur Fund, Inc. and BankVista 6 each, and The Citizens National Bank of Park Rapids 5. Franchised hotels are 48.9% of loans, so independents make up much of the book. Saint Louis County leads with 20 approvals, ahead of Crow Wing with 11 and Hennepin with 9, and lake counties such as Otter Tail, Cass and Lake also appear.

Minnesota hotel outcomes

At least 10.4% of Minnesota's FY2017 to FY2024 hotel approvals were cancelled, and the ceiling is 11.8% once undisbursed loans are added. Losses have been low: of the 83 hotel loans Minnesota disbursed during FY2017 to FY2021, 1.2% are charged off, and the five-year figure is that same 1.2%, so each Minnesota loss so far came early. These are floors. Volume swings: 25 loans for $38.6 million in FY2022, 10 in FY2023, and 23 for $39.3 million in FY2026.

What a Minnesota hotel study has to prove

A Minnesota study has to show that a smaller property can carry its debt through the seasons. Demand testing means the submarket's occupancy and rate by month, since lake and North Shore properties in counties such as Crow Wing, Cass or Lake depend on summer and weekend trade, while a Hennepin or Dakota hotel follows business travel. Cost testing covers acquisition or construction, deferred maintenance and any brand improvement plan. Debt service coverage must hold through the weakest months, not on an annual average. For the many 504 loans the appraisal is central: the hotel must support its value as real estate and as a going concern, with the two separated.

Because Minnesota hotels and motels share one code, a Minnesota limited-service motel and a full-service lake resort look the same in these figures.