One of the most exciting tools in the RV park industry is the Small Business Administration (SBA) loan option. Under this program, the RV park buyer can get an SBA loan with as little as a 10% down payment, a low-interest rate, and a fully amortizing 25-year term. That means you have no risk in the loan ever coming due and only have to make your monthly payment for 25 years, and it’s yours free and clear. In a world in which 3 to 5 years is the banking loan term norm, these SBA RV park loans offer an unequaled sense of security and safety in an unstable America. And there’s nobody who knows this program better than Bruce Hurta with Ameris Bank – he’s been in finance for over 40 years and specializes in just this one sector of lending.
In this video discussion, we’re going to dive deep into the SBA loan product (and its companion USDA loan for amounts greater than $5 million) and review all the terms of the loans, requirements of the borrower, and even lessons learned on loans that do great from those that struggle. It’s 100% straight information with no topic too taboo.
A 25-Year Fully Amortizing RV Park Loan With Only 10% Down - Transcript
Frank Rolfe: Welcome everybody, this is Frank Rolfe with RV Park University. We're going to be doing a discussion with about SBA lending on RV parks. We got with us Bruce Hurta. You may know Bruce. Bruce has been in the lending industry for about 40 years, so he's certainly more than qualified on the topic. He is with Ameris Bank a leading lender in the RV park industry. And Bruce, are you here with us?
Bruce Hurta: Yes, I am. Thanks for having me.
Frank Rolfe: Well, great. We're very glad to have you. All right, well, Bruce, let's just start off with what is a SBA loan? What is the SBA program? How does that work? Where did it come from? What does it all mean?
Bruce Hurta: The SBA has been around since 1953. And we typically use the SBA government-guaranteed long program called the SBA 7 [a] loan program, and we can use that for any legitimate small business purpose. So that in the campground realm, that could be a business acquisition or partner buyout or business expansion, business start-up with new construction or it could be refinancing existing debt for better terms. With the government backing on the loan, the bank gets a partial government guarantee to protect against loss if we ever had to foreclose, and that allows us to offer lower down payments and longer repayment terms than conventional bank financing.
Frank Rolfe: Got it. So the SBA program itself, it's not like you're getting the loan through the government, the government is acting to help allow you to make the loan, is that correct? So it kind of works with the bank. The bank is offering the financing, not the government. Correct?
Bruce Hurta: Yes. We're lending the bank's money, and we have to follow all of the US Small Business Administration guidelines for originating the loan. The business has to be eligible, and in the campground industry, what that means is where we need to make it fit the hospitality industry classification. And that means short-term stays. If you have an RV park where people are primarily renting monthly or living there, that's not an eligible small business that would be classified as a residential development.
Frank Rolfe: Can you have a little of that though, or does it have to be 100% short-term? Could you have a few people that stay in there by the month or?
Bruce Hurta: Yes. You can have a mix. SBA understands that as long as your primary business is gonna be short-term rentals that'll make it eligible. And the way they define that is at least 51% of your rental revenues need to come from transient guests with short-term stays less than 30 days.
Frank Rolfe: Gotcha. And what is the history? Why did the government start doing these programs? What year did SBA begin? Is it like from the 1930s, or is it more recent times, or how long has the program been running?
Bruce Hurta: The agency was established in 1953, and they offer all types of assistance to small businesses. I don't know exactly when the government-guaranteed loan program began, but when I began my banking career in the early 1980s, the loan program existed at that time. It wasn't as streamlined as it is today. Back then it was a very cumbersome process. First, we'd have to get the loan approved at the bank, and then we'd have to go to our local SBA office and go through a whole separate loan approval process with that office.
Bruce Hurta: Sometimes that would be kicked up to a regional or a national level for another approval at SBA, and it would take months. Nowadays, you have banks like Ameris Bank that are designated as preferred SBA lenders. That means we've done so many SBA loans that we developed a track record with the SBA. We've kept our losses within a acceptable ratio, and all of our files are documented correctly whenever we get audited by SBA. So now they give us the authority to approve the loan on behalf of the SBA. We do all the processing, approval, closing, servicing in-house without even involving the SBA.
Frank Rolfe: Got it. And how long ago did they first start doing RV parks? Was it a long time ago or is it a fairly recent phenomenon?
Bruce Hurta: It's probably a more recent phenomenon, just that banks... Participating banks had to develop an appetite for the industry. And as you know, banks have not been known for being familiar with and comfortable working in this industry. That's why I got into SBA lending in the first place, was it was at a time when I was at a small community bank where I had trouble approving small business loans. And I found that if I started putting a partial government guarantee on 'em, I'd get 'em done and accommodate my bank customer.
Bruce Hurta: But it wasn't until I was working for a non-bank SBA lender, I guess 15 years ago, that I discovered this industry and decided to start specializing in it. At that time my parents, who were workaholics, took... They bought and RV and started leaving Texas and going to Colorado every summer, and I couldn't believe it. I was so impressed that they actually would stop working and take a vacation. And I thought there might be something here for a banker, and I discovered the banks were not accommodating many of these small business owners in this industry.
Bruce Hurta: And I was working for a non-bank lender that was open to lending with the SBA program in the industry, and that's when I got started doing those types of loans. I joined this bank five years ago, specifically to develop more of this type of business for this bank, Ameris Bank. And I'm in their small business, government-guaranteed lending division, where we do both SBA loans and USDA loans for small businesses. And I'm the bank's loan officer that specializes in outdoor hospitality property financing. So that would be RV parks, campgrounds, RV boat, storage facilities and glamping resorts and any related outdoor hospitality properties.
Frank Rolfe: And Bruce tell us for a minute about the... You mentioned USDA which I assume is the US Department of Agriculture, is that correct?
Bruce Hurta: Yes.
Frank Rolfe: So they are also doing this?
Bruce Hurta: It's a very similar loan program to the SBA 7 [a] loan program with the partial government guarantee on the loan. It's kinda like... But it's guaranteed by a different federal agency. And this agency's requirement is that the small business has to be located in a rural area to be eligible. The USDA lending program is kind of like the pioneer days of SBA lending. It's still a very cumbersome process and time-consuming, and we have to go through the local USDA office for a second round of approval. However, we can do larger transactions. With the SBA 7 [a] loan program, we can only go up to 5 million per borrower. With the USDA loan program, we can go up to 25 million per borrower. So, I will always choose the SBA loan program first, but for larger transactions over 5 million, I'll default to the USDA program if it has a rural eligible location.
Frank Rolfe: Yeah. It seems strange the Department of Agriculture would be involved in something like this. Is this unique 'cause you never hear about the USDA being involved in lending very much?
Bruce Hurta: It's to promote rural development. And they have not only the USDA Business and Industry loan program, there's also a USDA Community Facilities loan program designed for non-profits. So you might see medical facilities and things like that that would go into that program. But yeah, as long as there is a rural development component that's when they get involved. It doesn't have to be agriculture. Fact is they have specific programs for agriculture that we don't participate in.
Frank Rolfe: Gotcha. Okay. Well, tell people a little bit about how a typical SBA loan works. Like what is the down payment, the amortization, the term of the loan, coverage ratios? What are some of the kind of the basics of SBA lending in RV parks?
Bruce Hurta: Well, I really see a couple of different kinds of transactions primarily. The one that I most commonly I'm participating in is financing for a business acquisition. So I provide financing for a lot of first time owners of RV parks that might have trouble getting conventional bank financing because of their lack of experience in the industry. But if they're buying an RV park that has a track record and it's already successful, then we're willing to put an inexperienced borrower into that project as long as they've got some related business management credentials and good credit, adequate down payment and so forth. The other type of loan application that I'm seeing is startups that involve new construction. On those, we're not typically gonna approve financing for a first-time owner. Our loan policy says that for a startup or for a business acquisition that needs to be turned around because it wasn't really successful, we require the borrower to have direct industry management experience.
Bruce Hurta: That requirement could be waived if we have a borrower that has really strong related business management credentials, a stronger than average financial statement, maybe other sources of income and other investment assets that could strengthen the loan application and justify a waiver. Or, if they join one of the top franchises, KOA or Yogi Bear's Jellystone. We know that they're buying into a successful franchise management system, and therefore if they're approved by that franchisor, we will not have that experience requirement.
Frank Rolfe: And what is roughly the... For example, how much down payment do you have? I know SBA loans are very attractive in that regard. How does the downpayment work?
Bruce Hurta: For business acquisitions, the minimum down payment is 10%. Average down payment on the probably last 15 or 20 transactions I've done in the last couple of years has been 20%. Those same borrowers, if they went, found conventional bank financing, would probably pay 30% down. So that's how it compares. If they got bank financing, it'd probably be a loan with a maturity in three or five years. Whereas, with the SBA loan, it's permanent financing for 25 years.
Frank Rolfe: Wow. That is impressive. So it's a fully amortizing loan, like a house mortgage, only it's 25 is versus either 15 or 30 on the house. So that's obviously huge, huge draw. Correct?
Bruce Hurta: Yes. It illuminates renewal risk. Small business loans have two types of risk that are pretty common, interest rate risk and renewal risk. 'Cause most small business loans, the interest rate is tied to prime. And when the prime rate changes, it's a variable rate that adjusts, it may adjust quarterly, annually, semiannually, every five years. But at some point, it's going to adjust. So it's hard for a small business owner to get away from interest rate risk. But with SBA financing, you can get away from the renewal risk.
Frank Rolfe: Gotcha.
Bruce Hurta: 'Cause if you're at the bank with a loan feature that comes due in five years, you don't know who's gonna own the bank, who's gonna be in charge of management, what the economy is gonna be like, how your business is performing. Those things are all unknown five years from now, and so there is some risk in whether the bank will renew the loan, and that's important to some people. Some borrowers may have great banking relationships and don't need to worry about that, but...
Frank Rolfe: Okay. And obviously, the whole point of the SBA is trying to promote small businesses. So I assume as, a result, they're a little more forgiving, maybe than some banks on your finances going in 'cause they're trying to promote people to get in the business. So what typically is the liquidity and credit score that someone would need to do an SBA loan?
Bruce Hurta: I like to work with people, but I don't have to tell a story about bad credit so... That just makes it much tougher. Sometimes I will take on that challenge if there is a reasonable explanation for a period of time where credit was bad, everybody has that once in a while, but I prefer to work with people whose personal credit score is 700 or better. As far as down payment, that average down payment on acquisitions being around 20%. Non-start-ups, it's been more like 25 or 30. In addition to the cash required for the down payment, the borrower should also have additional reserves for emergencies, personal or business emergencies and reserves. We look it down on a case by case basis. Some borrowers have more needs for existing personal debt and personal living expenses than others do. Typically, we're gonna look at... Even a mom-and-pop small business borrower, we'd like to see that their business will give them at least 30,000 a year in owners compensation.
Frank Rolfe: Gotcha. All right, so Bruce, it sounds like obviously SBA loaning is an amazing tool. Not only can you do as low as 10% down, but that 25-year fully amortizing dimension is hugely attractive because traditional bank lending, as you say, is often a five-year term. And even with conduit lending, you're only at a 10-year term. So I don't think there is any other loan program I'm aware of that goes to 25 year fully amortizing with the exception of your traditional single-family home loan, and that's kind of it. So then my next question would be, since it is so attractive is there any limitation for people who are too rich and to successfully to use the SBA? Not the minimum that's required to get into it, but are there any things that make you where you can't use SBA? I guess the question is, who can't use the SBA program then because it's so attractive?
Bruce Hurta: Yes. If you have more cash than what you're asking to borrow, you're over-qualified. So that's one limitation. SBA would not allow it. The other is that there is a bias against people that have additional assets, particularly real estate with equity, because when we're looking at the collateral on the loan, when we get a campground appraised, it's considered a special purpose property. And federal guidelines require us to get a going concern value real estate appraisal. That means the appraiser has to break out the business value from the real estate value. And so a campground that has no business value, it depends on where it's located. If you're near a metropolitan area, you've got a lot of real estate value there. If you're out in the sticks, you might not have a lot of real estate value, it may be mostly business value. Only the real estate value contributes to collateral value for the bank. So if we are undersecured, SBA has a requirement that the borrower pledges other real estate to fully secure the loan, if they have other real estate available to pledge. So that's a little bit of a bias against people with real estate assets. Not a lot of my borrowers have that, except they may have equity maybe in their house or a rent property, and we may take a second lien sometimes to help shore up the collateral coverage. And usually that's not a problem for my borrowers. They're not sophisticated real estate investors most of the time.
Frank Rolfe: Can you buy a RV park in a partnership with SBA? In other words, if you had two people that wanted to buy the RV park, not just one person, can you still do an SBA loan if there are two people involved, or is it have to be just one individual?
Bruce Hurta: You can have as many owners as you want. And anybody that owns 20% or more is required to personally guarantee the loan.
Frank Rolfe: Okay. Got it. Got it. All right. What if you had 10 people that only had 10% each, then what would happen to the personal guarantee?
Bruce Hurta: We would look for the person responsible, primarily responsible for management and the success of the campground, and they would be required to be a personal guarantor even if they own less than 20%. If there's one or two individuals that are the primary contributors of the down payment and the cash equity, we might target them as a personal guarantor because they're the ones that made the deal work with the cash. But if the cash contribution is spread out over 10 owners and they're all small contributions, we're primarily gonna look for the manager, person that's responsible for day-to-day success.
Frank Rolfe: What are your reporting requirements? Do you just provide an audited financial annually, or what do you have to give the SBA? Is it a monthly report or how does that work?
Bruce Hurta: Annual financial statements, yes. Don't have to be audited. Primarily with small business government-guaranteed lending, we rely on tax returns. So they'll give us their tax returns and an updated personal financial statement each year.
Frank Rolfe: And we talked for a moment about the rural aspects of the USDA loans. Are there any market requirements for SBA? Are there some states that are redlined, they won't loan in, or are there any criteria with an RV park that they won't finance through SBA? How does that work?
Bruce Hurta: No geographical restrictions with SBA.
Frank Rolfe: Okay. So anywhere is fair game with an SBA loan, essentially?
Bruce Hurta: Right. Yes. And our bank works nationwide.
Frank Rolfe: The people who come in and say, "Hey, Bruce, I wanna do an SBA loan," what percent of those people ultimately are approved? Is it half of all applicants, greater than half? What are the odds of getting the loan?
Bruce Hurta: Much higher for business acquisition loan applications. They're much easier to get done.
Frank Rolfe: Sure.
Bruce Hurta: Start-up is a huge challenge. Before they can even make the loan application, they need to nail down all their project costs. And you know how hard that is for new construction these days. That means you're gonna have to spend money on your engineering and architectural drawings and make sure you can get permitted, and that's a significant investment before you even make a loan application. You're not gonna be able to get a reliable general contractor's bid on the project, and we won't know what it's gonna cost without those drawings. Another thing with the start-up is you need to do a market analysis, a feasibility study. That can be expensive, it can be time-consuming. If the borrower has the credentials to do it themselves, they can, but most don't. Whereas, with business acquisitions, we've got a buyer with cash, ready to buy, knows what they want. When they find it, they're ready to take action. You've got a seller with financial information that we can look at and determine if they can afford the payments, that can happen pretty quickly and pretty easily.
Bruce Hurta: So I get a lot of tire kickers on start-ups and new construction and spend a lot of time talking to those people where they don't come to fruition. But with business acquisitions, it's only if I run into a problem with enough cash to do the transaction, or if we turn up issues in their background check or their credit with former bankruptcies or convictions or things like that, surprises like that, that would cause them to get declined.
Frank Rolfe: Gotcha. And you had mentioned if someone is in the franchise system, I think of KOA or Yogi Bear, that that improves the loan. We lost you, Bruce. Hold on a second. There you are. That that improves the bank's and the SBA's opinion on the loan. How hard is it to get in with those groups? In other words, if you said, "Well, it sounds like the best thing for me, given my expertise, is to try and be part of the KOA." How hard is it get in with KOA? How exclusive is that?
Bruce Hurta: They're gonna have a minimum investment amount, and you have to choose a location where they don't already have an existing franchisee. They're gonna look for certain management credentials. So yeah, there is a process of being approved, and you need to be a qualified buyer. If you're doing a start-up, they're gonna help with all that, all of the planning and costing. If you wanna buy an existing franchise campground, they can connect you with brokers that are specializing in reselling existing campgrounds that are in the franchise. I know some of those as well. With SBA lenders, there's a company called FRANdata that rates franchises and their performance for the SBA lenders. Both KOA and Yogi Bear Jellystone are highly rated by FRANdata, and both of them, we can look at all the statistics on SBA loans that they've done over the years and they both had very low default rates. And so our bank and probably other SBA lenders as well are gonna have preferred lending guidelines for those franchises.
Frank Rolfe: And Bruce, from a 5000-foot elevation and without any detailed information, give someone an example of one of your most highly successful business acquisition SBA loans and why that went so well. Oh, we've lost... We lost you, Bruce. Hold on here. Yeah, there you are, Bruce. What would be one of the better business acquisition SBA loans you observed? Just on a very macro level, what makes the good one so good? What are some of the things, for people watching, to say, "Yeah, I'm interested in the RV park business SBA loan"? What were some of the traits that made some of those really most successful deals so successful?
Bruce Hurta: I got a call two weeks ago from a woman that bought an RV park in 2017, and then at the time, she needed to close on that really quickly to satisfy the seller. And so she didn't have time to go to a bank and she went to a hard money lender, basically a real estate investor that charges high rates and hopes that you default on the loan. But she got it closed, and she started doing a lot of improvements at the campground. She bought it for about... I think it was $1.2 million, and it was in the area where it's hard to buy new land and do any new developments and get permits. So she kinda had some exclusivity with this campground, and it was really a value-added opportunity. She came to me, I guess she was like two, 2 1/2 years into it and needed to refinance the hard money loan, and we did that with an SBA loan and stretched out her payments over 25 years. When she called me a couple weeks ago, she said, "My property... " This is two years after refinancing and she's, I guess, four or five years in, that the property is now worth $4 million.
Bruce Hurta: She's probably... Besides her purchase price of 1.2, she's probably put several hundred thousand more into it, but certainly not more than $2 million investment, and it's now appraising at $4 million. So she wanted to know, "How can I tap that equity to buy another RV park?" And I said, "Well, we can do that with an SBA loan. We may have to cross-collateralize the two loans, but that's how we could do it." And so she's out looking for her next campground opportunity.
Frank Rolfe: Gotcha. And of the deals over the last 40 years that you've done that have not done well, what traits have they shared? Either on the purchase of an existing or building one, what are some of the pitfalls people need to be aware of that make the business not work? Just from a very, very 5000-foot, broad, no detailed aspect, what things are bad for RV parks and RV park lending?
Bruce Hurta: Well, on a start-up, the biggest challenge has been construction costs and time frames, with supply chain issues, and labor issues, and rising interest rates, and all that. I think every construction loan that we've had in the pipeline has had change orders, cost overruns, delays due to delivery of materials and labor shortages and budget overruns, and that's been a real challenge, just trying to get your arms around that and manage it and control it. And so if a borrower on a construction project is really outside of budget and they can't make up the difference and we've already loaned them as much as we could, that could be a bad situation to be in, and that happens sometimes. On the acquisitions in the last couple of years, the industry has been surging so much. Probably the biggest risk might be overpaying for a particular campground. Some sellers are getting pretty aggressive on their prices. That average 80% loan that I've been doing in the last couple of years, I'm having a harder time qualifying some of the new buyers with the higher interest rates and the higher sale prices. They may require a larger downpayment to make the loan a size the business can even afford the payments.
Frank Rolfe: What have you seen recently as far as cap rates, just roughly? What's the range of cap rates you're seeing most deals come in at?
Bruce Hurta: I don't know because I don't pay attention to cap rates. I look at cash flow strictly. It's cash flow to make loan payments and that's what matters to me. And I see buyers making all kinds of assumptions on cap rates and decisions on cap rates, and it's very difficult to do that in this industry because there's everything from the mom-and-pop level to a very sophisticated resort, and those are not comparable in the way you should evaluate their potential. And a cap rate, I don't know, is the best way to do that, but it may be the only way to try to make it comparable, so it's challenging.
Frank Rolfe: Sure. What is your typical debt coverage ratio?
Bruce Hurta: We look for a debt coverage ratio of 1.2 or better. That means that we've got about 20% cushion in the cash flow above and beyond the operating expenses and loan payment requirements. That's prudent lending. I'm gonna compute a debt coverage ratio on each of the last three years tax returns from the seller. So you may not have 1.2 across the board, but we're looking for it to be trending in the right direction and be at least 1.2 in the most recent tax year. If you get up to 1.15, you're not quite to 1.2 in your 2021 tax year but everything was trending up in the debt coverage ratios in '19, '20 and '21, and you've got '22 looking really good again and your projections are trending the same way, that could work as well. We will stretch on those points sometimes. And sometimes that depends on the depth of the personal financial statement of the borrower and how much additional risk they can take on with their assets.
Frank Rolfe: Bruce, how long does it take someone to get an SBA loan? If someone came to you and said, "Hey, Bruce, I wanna do one of these loans," what are you estimating the time will be to do it? What does it take from the first call to you to funding day, roughly?
Bruce Hurta: From start to finish, two to three months. Two months would be ideal, but in this COVID environment, we've had trouble with third-party providers sticking to their schedules. Your appraiser or your surveyor, your environmental site assessment, your inspectors, if you're doing construction, the bank's attorney, there's a lot of third parties to pull together for a loan closing, and we've had a lot of excuses for delays. So I used to say two months and now I say that's been stretching out to three months. And sometimes it depends on the borrower. As I'm working through the loan application, and I'm doing my write-ups for credit, and I'm requesting information and trying to get questions answered, it depends on how prompt the buyer is and the seller with answering my questions. Some are very prompt and some are not, and that could slow down the process.
Frank Rolfe: What is the USDA... If someone has the deal over 5 million, what is the USDA turnaround time, roughly?
Bruce Hurta: You've gotta add at least probably another three or four weeks for the USDA process after our process.
Frank Rolfe: So it's more of a four, even five-month process then?
Bruce Hurta: Yeah. And like right now, if somebody applies for a USDA loan, they're out of money this year and they've gotta wait for Congress's new allocation, which will... The beginning of the federal fiscal year is gonna be October 1st. So we're processing loans, it will close after October 1st. If you're doing new construction with a USDA loan, they have a special additional requirement. They have to do an inter-agency environmental review, which means we've gotta run it through all the different agencies for wetlands, tribal lands, endangered species, and so forth. That adds another couple of months sometimes to the process. And you can't break ground or do anything with regard to the construction, can't even complete the loan application until that process is completed. So when we start the loan application, we start that environmental review immediately, so it can be going concurrently.
Frank Rolfe: Bruce, you look like a nice guy, a happy guy. There's no reason why anyone would be afraid to contact you, I would hope. So even if someone has not done an SBA loan before or didn't even know USDA does loans, if they wanted to reach out to you and just explore the possibility, 'cause clearly a superior traditional bank lending, I think anyone would obviously say anything that offers a 25-year fully amortizing note is superior to any other form of lending, how is the best way to reach Bruce Hurta? How do they do it? What's your contact information?
Bruce Hurta: Well, all my contact information and blog articles and so forth are at a website, brucehurta.com. My phone number, cell number, I work remotely out of a home office for my bank in Atlanta, and that phone number is 281-384-2595. My email address is [email protected].
Frank Rolfe: And Bruce, just so people know, your last name is spelled how? How do you spell Hurta? It's not H-E-R-T-A, it's H-U-R-T-A, correct?
Bruce Hurta: That's correct.
Frank Rolfe: Right. So it's Bruce, H-U-R-T-A, Hurta, just for those who are trying to spell it out. It's not H-E, but it's H-U. Well, Bruce, we really appreciate you taking the time to be here. The whole SBA USDA Financing is obviously a hugely attractive piece of RV park investing. And so for anyone listening to this who's looking to buying an RV park, trying to figure out, "Well, gee, what would be the best way to finance it?" Clearly, Bruce is your answer, because you can't get anything approximating a 25-year, fully amortizing, and potentially 10% down loan. It doesn't exist in the traditional banking world. So it's very attractive. And again, if you want more information, reach out to Bruce. He'd happily give it to you. So Bruce, again, thanks for your time to be here. And thanks for everybody, and we'll talk to everyone again real soon.
Bruce Hurta: Well, thank you for having me. And anybody that wants more education on RV parks, RV Park University is the place to go. I get so many callers that have talked to you first, and apparently you guys get around. [chuckle]
Frank Rolfe: Great. Thanks, Bruce.
Bruce Hurta: And you have a lot of credibility in the industry.
35:08 Frank Rolfe: Great, thank you. All right, thanks everyone. And we'll talk to everyone again soon.