Few people realize that the U.S. Department of Agriculture is an aggressive lender on RV Parks. The USDA offers 25-year fully amortizing loans on RV Parks which may have no pre-payment penalty after three years and only around a $1 million minimum loan size. They will also finance RV Parks in rural locations. In this video we discuss with Bruce Hurta from Business Finance Depot the current lending market and the USDA program in particular.
U.S. Department of Ag Finances RV Parks? - Transcript
00:00
Frank Rolfe: Hi, everybody. Obviously, when you buy an RV Park, finance is an integral part of that deal. So we thought it would be a good idea to get Bruce Hurta on here, who has been doing and financing RV Parks now for over a decade. He is with a group called Business Finance Depot. And they handle everything from SBA loans to regular bank loans, you name it. And we thought it'd be very interesting for people to get a current handle on the banking situation with RV Parks. Obviously, you've seen a huge run-up in interest rates since Q1 of 2022, although if you're as old as Bruce and I, it doesn't seem that odd, because prior to 2007-2008, rates were basically the same as they are now. So it's kind of like a return to the future of those people who are over 40 years in age, but for those who haven't been through higher rates or what are really normal rates, we thought it'd be important to find out what's going on in the world of banking with RV Parks. And Bruce, how are you doing today? We're glad to have you. How is it going in Bruce Hurta land?
01:00
Bruce Hurta: Well, I think that was a really good preface to our conversation, Frank, talking about interest rates, because that has certainly impacted the market. Over the past couple of years, working for a bank, I did a lot of financing of business acquisitions for campgrounds, RV Parks, other outdoor hospitality properties with SBA loans. And with interest rates having doubled in the last year, that means payments are 50% higher, and that makes affordability an issue on these business acquisitions.
01:36
Frank Rolfe: Sure. So let's talk for a minute. If you were buying an RV Park today, what are some of your financing options? You have obviously SBA lending. What else do you have?
01:46
Bruce Hurta: The USDA loan program is really similar to the SBA loan program with the federal backing, and it allows lower down payments and longer repayment terms than conventional bank financing. The difference with USDA is that it does have to have a rural location, and we can do larger transactions with USDA, up to $25 million per borrower, whereas with SBA, it's only up to $5 million per borrower.
02:13
Frank Rolfe: Bruce, define rural for us. So what is the definition of a rural property? What are the specifications?
02:21
Bruce Hurta: Population under 50,000, and sometimes it's not easy to determine if you've got that, but USDA has, on their website, if you plug in a street address, you can determine immediately if it's an eligible rural location.
02:40
Frank Rolfe: Got it. That makes it sound simple. Okay. And then what else can you tell us as far as this USDA program? What is the loan length or amortization length? Is there a balloon payment? What are kind of the interest rates you're looking at? How's all that looking right now?
02:57
Bruce Hurta: It's like the SBA program, it's long-term permanent financing. Even if we're financing construction, which with conventional bank financing would typically be a short-term loan to be paid off with your permanent financing. The SBA and the USDA loan programs act as both your construction and development financing and your permanent financing, all in the same transaction. 25-year term, typically your rates are tied to the Wall Street Journal prime rate. So when the Fed increases the Fed rate, that means the prime rate increases, which means small business loans become more expensive. I think rates have leveled out, and where we're at today seems more normal, like you mentioned, based on my 40-plus year banking career. And I think that's where rates are today to stay for a while, and so...
03:58
Frank Rolfe: Is that a fully amortizing loan?
04:00
Bruce Hurta: Pardon?
04:01
Frank Rolfe: Is that a fully amortizing loan? Or do you have...
04:03
Bruce Hurta: It's a fully amortizing loan.
04:07
Frank Rolfe: Wow, that is impressive. So you're saying 25-year fully amortizing?
04:11
Bruce Hurta: Yes.
04:12
Frank Rolfe: Is that correct? Okay, that's pretty amazing. Why would the USDA, which I assume is the US Department of Agriculture, why would they be financing RV Parks? I think would be a question people would ask.
04:25
Bruce Hurta: They finance all types of small business and rural commercial real estate for economic development in rural areas.
04:35
Frank Rolfe: Got it. Okay. And what is the minimum size of a deal that you can do through a USDA loan?
04:43
Bruce Hurta: Typically, most lenders are going to want a minimum loan size of a million on a USDA transaction. The program is not as user-friendly as SBA. It's kind of like the old SBA from many years ago, where after the bank or participating lender approves it, it's got to go through a second round of approval with the USDA. USDA is not centralized like SBA. You've got your different offices in different states that we have to go through, and they may have different processing timeframes or a different way of looking at a transaction. So on transactions that are smaller and fit SBA, that's usually going to be my first choice.
05:25
Frank Rolfe: Got it. And so what other banking options do you have out there? Because obviously the USDA program sounds pretty amazing, but what else is there out there for people?
05:33
Bruce Hurta: At Business Finance Depot, we also have equipment lease financing, which could be helpful for the business owner that wants to add park models or cabins, and they don't want to refinance their real estate. We also have unsecured small business lending programs for borrowers that need a smaller loan amount, that don't want to go through the entire process of SBA or USDA loan application. And so we look at different resources for funding the project, including retirement account rollovers. That's something else that we can accommodate where people are taking retirement funds and investing it in their business.
06:21
Frank Rolfe: Okay. And going back to the USDA loans for a moment there, what is, for example, the coverage ratio that they're looking for? What are some of the the underwriting items that they're looking for in an RV Park?
06:33
Bruce Hurta: Just like SBA loans or any small business loan, we're looking at repayment ability of the business to afford the proposed loan amount. And so a debt coverage ratio that a lender likes to see is usually 1.2 or better. That means we've got about 20% cushion in the cash flow after covering operating expenses and loan payment requirements.
07:00
Frank Rolfe: Okay. Which again is very, very reasonable, right in line pretty much with the way banks work. So Bruce, what does it cost someone to do a USDA loan? What are the upfront typical costs as far as points or legal fees or anything? What does that normally look like?
07:16
Bruce Hurta: With both SBA and USDA loan programs, I tell people to estimate somewhere between four and five percent of the loan amount and loan closing costs, and about half of that will be the government fee. The other half is going to be your legal fees, appraisals, survey, environmental assessment, filing fees, and so forth.
07:39
Frank Rolfe: And then what is kind of your... Obviously, no one has a crystal ball, but you as Bruce Hurta, what are you thinking as far as the future of interest rates? Obviously we saw just recently the Fed did not raise them yet again, so the consensus is they're done raising. So I guess the question is more the lines of reducing. What are you thinking on that or where are you seeing... What do you project rates will be in the... Going forward? Do you think they'll start coming down a little or stay where they are, what do you think?
08:09
Bruce Hurta: [chuckle] That's a good question. We live in a pretty crazy world these days with a lot of factors that are affecting interest rates. And so I would be crazy to try to predict interest rates, but being an old banker, 40 years plus experience in small business lending, where rates are today seem very normal to me. Where they've been the last few years is highly abnormally, I mean low. I mean, too low. And I expect where we're at today is about where it'll level out, and we need to get used to the new rates. And I'm starting to see that in the market, I'm starting to see sellers that have lost enough transactions because their buyer couldn't qualify for financing, the debt coverage ratio wasn't there when you looked at the business's historical earnings with the higher interest rates, and so they're starting to lower prices after losing a few transactions. And the market is adjusting and making financing more affordable for buyers. Activity is picking up in the business acquisition market a little bit now. It really died during the first part of this year.
09:25
Frank Rolfe: And Bruce, if you have a 25-year fully advertising USDA loan, what do you do if you sell 10 or 15 years in the future? Are there any penalties, or can you sell, or what happens?
09:38
Bruce Hurta: Yes, like the SBA loan program, there are prepayment penalties, or like most permanent financing programs, the lender wants to hang on to the loan for a while and earn their interest, and so there are prepayment penalties. The nice thing about the SBA loan is it's only for three years. It's a very light prepayment penalty. So even though it's designed for long-term permanent financing, there are borrowers that'll use it for the construction and development financing. They'll get past the three-year prepayment penalty. They'll have stabilized earnings showing up in a couple year's worth of tax returns.
10:15
Bruce Hurta: And they may go out and seek refinancing at maybe a better interest rate or maybe lock in a long-term fixed rate based on having a stabilized project. With USDA, it's not all the same. SBA dictates that the prepayment penalty is the same on all SBA loans, but USDA allows the lender to negotiate the prepayment penalty. So there's an inverse relationship between the interest rate and the prepayment penalty, and it depends on the borrower's needs. If they think it's going to be a long-term hold, they'll probably want to negotiate the highest prepayment penalty and the lowest rate. Whereas if they think they're going to sell in the future, maybe five years down the road, they'll want to negotiate and structure their prepayment penalty accordingly.
11:11
Frank Rolfe: And what... Just ballpark me, right now, what are you looking at as far as an interest rate on a USDA loan? Just very, very ballpark-ish.
11:17
Bruce Hurta: Well, once again, I take you back to the Wall Street Journal prime lending rate, which is what most small business loans are based off of. It's eight and a half percent right now. Most borrowers are paying for SBA and USDA loans somewhere between prime plus one and prime plus three, depending on their qualifications. So we're getting up in that 10 to 11 percent range.
11:42
Frank Rolfe: Got it. Okay. And Bruce, if someone wants to reach out to you and discuss getting lending on an RV Park, how's the best way to reach Bruce Hurta? What is your email and phone and contact information?
11:57
Bruce Hurta: Phone number is 281-384-2595. My personal website is brucehurta.com. My business website is businessfinancedepot.com. I can be reached via email at [email protected] or [email protected].
12:20
Frank Rolfe: Well, that's perfect. Well, Bruce, again, we really wanted to get you out here to get the latest updates on the financing. The USDA program, obviously, sounds very impressive indeed. That fully advertising feature, that's very remarkable in real estate lending, other than single-family mortgages, typically. So, again, thank you for being here, and if you have any interest in getting an RV Park financed, want to reach out to Bruce just in advance and find out your options, give him a call or an email, and he would love to talk to you. So, Bruce, thanks for being here, and we will see everyone again soon.
12:52
Bruce Hurta: Well, Frank, thanks for having me back. It's always a pleasure.
12:57
Frank Rolfe: Thanks, Bruce.