Hi,

We own an 8 room inn which we purchased 18 months ago for $900,000. We have a loan from a personal source. We have made all our payments on time and are making the business slowly pay for itself. We have a $40,000 incress so far this year for the first 6 months. Our credit is fine mid score is in mid to upper 6oo,s. We would like to either refinance the whole loan or take a second to do some renivating and updates. Similar houses in our area that are on the lake and about the same size have sold for 1.6 to 1.8 million in the last couple of months so the equity should'nt be a problem. I guess we would like to know what our best options are. We would have to go stated since the business is not showing a profit yet, do to depreciation. What are our options if any?

Thanks
Rickrshea

Your best bet might be an SBA loan since you only have 18 months of operating history and no profits. SBA loans are made on business projections. Some lenders focus more on historic cash flow while others are more comfortable lending on projections. You just have to find the right lender.

Another option may be bridge (not hard money) financing. If you can demonstrate increasing revenues and delcining losses, you might be able to get a 3-5 year loan that you can replace with permanent financing when the operations stabilize.

Just because the business does not make money does not mean the loan won't cash flow or that you have to get a stated income loan. Lenders add back the interest payments on your current loand and depreciation to figure out cash flow. Hope this helps.

Let me add that most SBA lenders will use the lower of the purchase price plus the cost of improvements, or the appraised value, if the property was purchased within the prior 2-3 years. This is a conservative approach. You didn't say what loan amount you were looking for, but generally, SBA loans will go to 80% LTV unless cash flow is very strong. There is no "stated" option in SBA lending, but, as the prior post indicated, you would add back depreciation and interest to determine cash flow. If trends are good, that also will be a plus.

Bridge lenders will provide a lower ltv (usually between 55%-65%) but often will use the appraised value. The interest rate may be slightly higher than the SBA rate, but the underwriting will be more forgiving on cash flow.

I'm not aware of any lenders that would do a second mortgage on this type of property. If the existing first mortgage holder is flexible, then another possibility would be to ask him/her to take a partial pay-off and then subordinate the remaining amount to a new first position mortgage.

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I actually closed a bridge loan this year with 100% financing on a gas station real estate purchase transaction. Interest rate was Prime + 2% floating and the lender charged 1 point. It was a special situation and it will be very difficult to repeat.