Case Study · South Carolina · Limited-Service Hotel · SBA 504
Limited-Service Hotel Feasibility Study, South Carolina — An SBA 504 Worked Case
This is how our independent feasibility study company and hotel feasibility consultant team analyzed a new-build, select-service hotel underwritten to an SBA 504 credit, from an STR competitive-set penetration analysis and a realistic ramp to stabilization through the debt-service coverage a lender must document. It is a representative, anonymized worked example of the methodology — not a specific client deal — set on a coastal, interstate tourism corridor in South Carolina.
A new select-service flag on a South Carolina tourism corridor.
A sponsor came to our feasibility study company with a ground-up, roughly 100-key select-service hotel — an upper-midscale national flag, in the broader limited-service family — and an SBA 504 lender that needed the projected cash flow independently tested before it would commit. The subject sits on a coastal, interstate tourism corridor in a fast-growing South Carolina coastal market, with interstate visibility and beach-leisure demand on the weekends balanced by corporate, manufacturing, and group demand midweek. The build program is a four-story, interior-corridor select-service property with a branded breakfast, a small meeting room, a pool, and a fitness room.
Because a hotel is a going-concern operating business rather than passive real estate, the lender's question is not “what is the dirt worth” but “can this specific site penetrate its competitive set, ramp to a supportable occupancy and rate, and service this specific loan.”2 Hotels are also named special-purpose properties under SBA rules, and an owner-operated hotel is SBA-eligible because the owner satisfies the occupancy test by running the business — the exact condition that turns a discretionary feasibility study into an expected one on a ground-up deal.1 Our scope was the independent demand, penetration, competition, and debt-service analysis that supports that credit.
Representative and anonymized. Every figure below is illustrative of a typical engagement of this type; the site, corridor, and parties are composited, not a real named borrower, address, or completed transaction.
STR penetration and a graded ramp to stabilization.
Hotel demand is not a capture rate applied to a traffic count; it is a penetration test. The subject's RevPAR is measured against the RevPAR of a defined competitive set, where 100 percent is fair share, and a new hotel earns that share over a two-to-four-year ramp rather than on opening day.
The corridor draws three demand layers: leisure travelers moving to and from the coast, corporate and manufacturing transient demand tied to South Carolina's industrial base, and weekend group and event demand. The subject is the newest and best-located flagged product in its set, so at stabilization the model credits it with a modest penetration premium — a RevPAR index near 106 percent of its competitive set — but only after a disciplined build-up. STR data show new-construction hotels reach a 100 percent RevPAR index around month 17, with the occupancy index starting near 58 percent in month one, and Cornell research finds an average occupancy build-up of about three years.4 Assuming a new entrant will immediately exceed fair share without a demand-generator or product-quality rationale, or cherry-picking a weak competitive set to inflate the index, is a classic review failure the analysis is built to avoid.5 The subject's stabilized 72 percent occupancy and $158 ADR sit within the band the state's coastal markets actually support, below Charleston's high-end strength and in line with the Grand Strand's rate structure.8
| Year | Occupancy | ADR | RevPAR | Comp-set RevPAR | Penetration index |
|---|---|---|---|---|---|
| Year 1 (opening) | ~59% | ~$150 | ~$88 | ~$107 | ~83% |
| Year 2 (building) | ~66% | ~$155 | ~$102 | ~$107 | ~95% |
| Year 3 (stabilized) | ~72% | ~$158 | ~$114 | ~$107 | ~106% |
RevPAR is ADR × occupancy; the penetration index is subject RevPAR divided by competitive-set RevPAR. Ramp shape grounded in STR/Cornell new-build build-up data; see sources 4 and 5. Figures are illustrative of the engagement type.
A justified competitive set, and the pipeline behind it.
Six flagged and independent hotels form the subject's competitive set within roughly four miles. The set is defined by segment, location, and demand orientation — not selected to flatter the subject — and the analysis scans announced rooms, not just the standing set.
| Property | Flag tier | Keys | Occ. | ADR | RevPAR | Distance |
|---|---|---|---|---|---|---|
| Competitor A | Upper-midscale (flagged) | 90 | 72% | $152 | $109 | 1.2 mi |
| Competitor B | Midscale (flagged) | 88 | 69% | $142 | $98 | 2.0 mi |
| Competitor C | Upscale (flagged) | 110 | 75% | $168 | $126 | 3.1 mi |
| Competitor D | Extended-stay midscale | 95 | 77% | $135 | $104 | 2.6 mi |
| Competitor E | Economy / independent | 70 | 64% | $120 | $77 | 0.9 mi |
| Competitor F | Upper-midscale (flagged) | 100 | 73% | $160 | $117 | 4.0 mi |
| Competitive set (weighted) | 6 hotels | 553 | ~72% | ~$149 | ~$107 | — |
Competitive set surveyed for the engagement; anonymized and rooms-weighted. Announced and permitted supply was scanned, not only the standing set, consistent with STR-based penetration practice. See source 5.
The set's weighted RevPAR of roughly $107 is the denominator behind the penetration index. The subject's newest product, best interstate visibility, and current-generation brand standards justify a stabilized ADR modestly above the set, which drives the ~106 percent stabilized index — but the analysis stress-tests that premium against a real pipeline risk: a competing flag opening nearby during the two-to-four-year ramp can permanently reset the penetration assumption.4 A rigorous study does not stop at the standing set; it scans announced rooms so the ramp is not quietly overstated by supply the trailing data cannot yet see.5 The economy and independent tier in the set is the softest defender — consistent with the K-shaped softening in South Carolina's coastal economy hotels — while the subject is positioned a full segment above it.8
South Carolina: a K-shaped coast, underwritten monthly.
The state backdrop is a tailwind for a well-positioned select-service flag, but the coast is bifurcated and seasonal. South Carolina was the fastest-growing state in the nation by percentage in both 2023–24 and 2024–25, and its coastal counties are among the fastest-growing in the country.
The Grand Strand around Myrtle Beach is demand-led and still growing — Horry County rose about 3.2 percent to 427,551 residents, one of the fastest-growing U.S. metros — but its lodging market split in a K-shaped way in 2025. Third-quarter 2025 occupancy fell to about 65.5 percent at a $155.53 average daily rate, full-year occupancy fell roughly 3.3 percent, and accommodations-tax collections fell about 10.8 percent as middle-income families trimmed discretionary travel and the economy hotels that make up half the inventory absorbed the worst of it; even so, direct visitor spending reached $13.2 billion in 2024, supporting more than 82,000 jobs.89 Charleston, by contrast, ran about 70.1 percent occupancy at a $168.41 ADR through the third quarter on high-end strength.8 The decisive consequence for underwriting is that a coastal South Carolina hotel must be modeled on monthly, not annual, demand, and positioned above the economy tier that softened — exactly where the subject sits.
Two South Carolina-specific line items must be modeled explicitly rather than folded into a national assumption. First, property tax: commercial and non-owner-occupied property is assessed at a 6 percent ratio against 4 percent for an owner-occupied home, so an income property can pay roughly 3.5 times the tax of an identical residence — a real drag on NOI that a lazy pro forma understates.10 Second, coastal insurance: Charleston Harbor reached flood stage 54 times in 2024, one of the most active years in a century of records, and NOAA projects roughly another foot of sea-level rise by 2050, so hurricane, flood, and property-insurance costs must be stress-tested, with Hurricane Hugo in 1989 as the benchmark event.11 Nationally, the sector is stabilizing: U.S. RevPAR was essentially flat in 2025 on the first declines since 2020, and new supply grew only about 1.3 percent, well below the long-run 2 percent, which supports a new, well-located entrant.6
Why the corridor supports a select-service flag.
Population growth, demand-generator mix, and interstate access all point the same direction, and the site geometry converts that demand into room-nights across the week, not only in peak season.
The coastal corridor pairs a fast-growing resident and retiree base with a durable visitor economy, and South Carolina's status as the nation's fastest-growing state by percentage means trailing counts understate the demand base a new hotel captures.9 The subject's value is in its demand diversity: leisure travelers fill the weekends and the summer peak, while corporate, manufacturing, government, and group demand fills midweek and the shoulder months. That mix is the antidote to the single biggest risk in a Grand Strand hotel — a purely seasonal, leisure-only pattern that swings 30 to 50 percent through the year and breaks a flat monthly pro forma.8
Site geometry does the rest. The parcel carries direct interstate visibility and a signalized access point on the corridor, so the hotel captures both the drive-in leisure traveler and the business traveler routing to nearby employers and the port-and-manufacturing base. An upper-midscale flag with current brand standards, a branded breakfast, and a small meeting room outperforms the aging economy and independent product in the set on both rate and occupancy, which is why the model credits the subject with a fair-share-plus penetration at stabilization rather than an average one. The nearest competitor is an older economy site that cannot match that positioning.
The SBA 504 structure.
Total project cost lands at $13.6 million, or about $136,000 per key — below the national select-service median as an efficient secondary-market build. The 504 program is purpose-built for owner-occupied fixed assets, which is why an owner-operated, special-purpose hotel routes here rather than to a working-capital-flexible 7(a).
| Cost component | Amount |
|---|---|
| Land (coastal / interstate parcel) | $1.60M |
| Site work & utilities | $1.10M |
| Building shell & structure (~100 keys) | $6.40M |
| FF&E (guestrooms & public areas) | $1.60M |
| Brand / franchise fees & initial standards | $0.35M |
| Soft costs, architecture & contingency | $1.15M |
| Pre-opening & operating / interest reserve | $0.85M |
| Working capital & closing costs | $0.55M |
| Total project cost | $13.60M |
Per-key cost is below the HVS national select-service median (~$223,000/key), reflecting an efficient secondary-market build; see source 3. Figures are illustrative of the engagement type.
| Item | Figure |
|---|---|
| Bank first mortgage (50%) | $6.80M — ~9.5%, 25-yr amortization |
| CDC / SBA 504 debenture (30%) | $4.08M — ~6.5% fixed, 25-yr |
| Borrower equity injection (20%) | $2.72M — special-purpose + start-up |
| Total project cost | $13.60M |
| Annual debt service (blended) | ≈ $1.04M |
Structure per SBA 504 conventions under SOP 50 10 8; owner-occupancy 60% for new construction, met by owner-operation. See sources 1 and 2.
A standard 504 splits 50 percent bank first mortgage, 40 percent CDC debenture, and 10 percent borrower equity. Here the equity injection is 20 percent, not 10, and the debenture steps down toward 30 percent: SBA escalates the required injection to 15 percent for a special-purpose property and to 20 percent when the project is also, as a ground-up build, effectively a start-up — and a hotel is both.2 The owner-operated hotel is SBA-eligible because the owner satisfies the occupancy test by operating the business, and its special-purpose status triggers the third-party feasibility study for virtually all hotel 504 applications, with the flag required to appear in the SBA Franchise Directory.2 On a 25-year amortization, the bank first at roughly 9.5 percent and the below-market debenture at roughly 6.5 percent blend to about $1.04 million of annual debt service — the number the projected coverage has to clear. In South Carolina the 504 routes principally through the Business Development Corporation of South Carolina and its affiliated Certified Development Corporation, administered from the SBA district office in Columbia; the July 2026 decoupling of the combined 7(a)-plus-504 ceiling to $10 million further enlarges bankable deal size.12 The study exists to support exactly the debt-service coverage the lender must document, tested against an independent read of penetration rather than the sponsor's own projection.
Feasible and bankable, on coverage that ramps to the SBA floor and beyond.
The stabilized model builds NOI from rooms revenue net of the franchise-fee load, a management fee, the FF&E reserve, and South Carolina's real property-tax and insurance cost, then carries the coverage through a graded ramp to a stabilized 1.40x.
| Line | Basis | Amount |
|---|---|---|
| Rooms revenue | ~72% occ × ~$158 ADR × 100 keys × 365 | ≈ $4.15M |
| Other operated revenue | Breakfast, meeting room, fees, parking | ≈ $0.25M |
| Total operating revenue | Rooms + other | ≈ $4.40M |
| Departmental & undistributed expense | Rooms, A&G, sales & marketing, utilities, R&M5 | ≈ ($1.85M) |
| Franchise & brand fees | ~11% of rooms revenue (royalty, reservation, marketing, loyalty)6 | ≈ ($0.46M) |
| Base management fee | ~3% of total revenue | ≈ ($0.13M) |
| Property taxes & insurance | SC 6% commercial assessment; coastal insurance1011 | ≈ ($0.32M) |
| FF&E reserve | ~4% of total revenue3 | ≈ ($0.18M) |
| Net operating income (NOI) | Total revenue less all operating cost | ≈ $1.46M |
Stabilized NOI margin ~33% of total revenue, consistent with select-service economics net of the franchise-fee load, a management fee, and the FF&E reserve. See sources 3, 5, and 6.
| Year | Stage | NOI | Debt service | DSCR |
|---|---|---|---|---|
| Year 1 | Ramp (opening; reserve-supported) | ~$0.94M | ~$1.04M | 0.90 |
| Year 2 | Building | ~$1.23M | ~$1.04M | 1.18 |
| Year 3 | Stabilized | ~$1.46M | ~$1.04M | 1.40 |
DSCR computed as NOI divided by the period debt-service obligation. See source 2 for the ~1.15x–1.25x SBA hotel coverage convention.
The stabilized 1.40x coverage is the figure the lender documents, and it clears the SBA's roughly 1.15x-to-1.25x hotel floor with real headroom.2 By Year 2 the project already covers fully amortizing debt service at 1.18x. The Year 1 figure of 0.90x is intentionally below the floor — it is the ramp year — which is exactly why the uses of funds carry a pre-opening and operating/interest reserve: the reserve covers the shortfall through lease-up, and permanent coverage is measured once the hotel reaches its supportable penetration around month 17 to 24. Modeling stabilized performance from opening day, or a fair-share-plus index on day one, is the single most common way hotel pro formas fail review; the ramp here is deliberately graded.4
On the equity side, the $2.72 million injection earns growing levered free cash flow — roughly negative in the Year 1 ramp (funded by the reserve), building to about $0.42 million a year once stabilized and net of the FF&E reserve for periodic room and public-area renovation. The exit is valued on a going-concern basis — real estate plus FF&E plus brand and business value — not a leased-fee cap rate: capitalizing a Year-10 stabilized NOI near $1.68 million at a going-concern overall rate around 9.75 percent — within the roughly 8.6-to-13.1 percent range the market applies to economy and midscale hotels and consistent with late-2025 hotel cap rates near 8.2 percent plus a secondary-market and coastal premium — implies a gross sale near $17.2 million, and roughly $7.8 million of net equity after selling costs and the outstanding 504 balances of about $8.9 million.73 Growing NOI at a conservative rate against South Carolina's coastal insurance and property-tax drag, the blended result is an illustrative levered equity IRR of about 18 percent over a 10-year hold.
Verdict: financially feasible and bankable. On an independently derived penetration ramp, a stabilized 1.40x DSCR, and a ~18% levered equity IRR, the projections support the SBA 504 credit.
Independent penetration, ramp, seasonality, and DSCR stress.
The engagement was scoped the way a credit committee reads it. As an independent feasibility consultant, our role is to test the sponsor's projection against the market, not to restate it — the value of the deliverable is precisely that it carries no stake in the outcome. We defined the competitive set by segment, location, and demand orientation, derived the subject's penetration from that set rather than from a raw traffic count, and graded the ramp to stabilization over two-to-four years at through-cycle margins — net of the franchise-fee load, a management fee, and the FF&E reserve — rather than a capitalized peak.5
The coverage analysis was then stress-tested. We ran the debt-service coverage against the variables a coastal South Carolina hotel is most exposed to — a competitor opening mid-ramp, ADR softness, seasonality on a monthly rather than annual basis, and rising coastal property-insurance cost — to confirm the credit still holds under pressure.11 One scope boundary is worth stating plainly: as the feasibility consultant, we reference, but do not perform, the Phase I environmental site assessment, which is a separate environmental professional's engagement that runs in parallel to the study. That combination — independent penetration, a graded ramp, monthly seasonality, and a stressed DSCR — is what lets the lender rely on the file.1
Underwriting a South Carolina hotel for an SBA 504 loan? Start with the feasibility study.
Feasibility Study Company prepares independent hotel feasibility studies for SBA 7(a) and 504 credits, built to the STR-based penetration and coverage standard your lender must document. A methodology briefing walks through the penetration, ramp, competition, and DSCR analysis behind a case like this one, calibrated to your corridor, flag, and market.
Request a methodology briefingData sources and dates.
The deal figures are illustrative of the engagement type; the market data that grounds each dimension is real and sourced, drawn from our standing South Carolina, Hotel & Hospitality, and SBA 7(a) & 504 analyses and the primary authorities they cite.
- U.S. Small Business Administration, SOP 50 10 8 (effective June 1, 2025) and 13 CFR 120.160(b): a feasibility study is discretionary but expected for special-purpose properties and ground-up/start-up projects; hotels are named special-purpose; owner-occupancy of 51% (existing) or 60% (new construction), met by owner-operation; 504 structured as a bank first mortgage, a CDC debenture, and borrower equity. As compiled in the firm's SBA 7(a) & 504 analysis.
- SBA SOP 50 10 8 and Congressional Research Service (IN12549), hotel provisions: an owner-operated hotel is an eligible SBA going concern; special-purpose status triggers a third-party feasibility study for virtually all hotel 7(a) and 504 applications; equity of 15% for special-purpose and 20% if also a start-up; SBA Franchise Directory listing required for the flag; typical minimum DSCR of ~1.15x–1.25x at stabilization. As compiled in the firm's Hotel & Hospitality analysis.
- HVS, 2025 U.S. Hotel Development Cost Survey (reflecting 2024 budgets) and Hotel Valuation Techniques: median cost per key by segment (limited-service ~$167,000; select-service ~$223,000; full-service ~$409,000; all-type median ~$219,000); the going-concern income approach; an FF&E reserve of 3%–5% of total revenue. As compiled in the firm's Hotel & Hospitality analysis.
- STR (2019 Hotel Data Conference) and Cornell University / ISHC: new-construction hotels reach a 100% RevPAR index around month 17, with an occupancy index near 58% in month one; an average occupancy build-up of ~3 years, with top-25 markets stabilizing faster than smaller markets; a competing flag opening during the ramp can permanently reset the penetration assumption. As compiled in the firm's Hotel & Hospitality analysis.
- STR/CoStar competitive-set methodology via MMCG analysis: the competitive-set RevPAR index (subject RevPAR divided by competitive-set RevPAR, where 100% is fair share) as the core penetration test; limited-service GOP margins ~45%–55% and EBITDA ~35%–45%; cherry-picking a weak set or assuming above-fair-share penetration without justification as classic review failures. As compiled in the firm's Hotel & Hospitality analysis.
- CoStar (formerly STR), full-year 2025 U.S. hotel performance (Arlington, VA, January 2026): occupancy 62.3%, ADR $160.54, RevPAR $100.02, the first full-year occupancy and RevPAR declines since 2020; census supply growth ~1.3%, well below the long-run 2%; the combined brand-fee load of roughly 10%–14% of room revenue (royalty, reservation, marketing, loyalty). As compiled in the firm's Hotel & Hospitality analysis.
- CBRE Hotels Research, H2 2025 Cap Rate Survey and CBRE data via Bay Street Hospitality: hotel cap rates ~7.3%–8.1% by mid-2025; economy and midscale hotel cap rates 8.6%–13.1% for the twelve months ending October 2025; late-2025 hospitality debt ~7.11% against cap rates ~8.17%. As compiled in the firm's Hotel & Hospitality analysis.
- College of Charleston Office of Tourism Analysis (May 2025) and Colliers South Carolina hotel data via Greenville Business Magazine (2026): Grand Strand / Myrtle Beach Q3 2025 occupancy 65.5% at a $155.53 ADR, full-year occupancy down ~3.3% and accommodations-tax collections down ~10.8%, with economy hotels (half of Myrtle Beach inventory) hit hardest; Charleston ~70.1% occupancy at a $168.41 ADR; Myrtle Beach Area CVB direct visitor spending of $13.2 billion in 2024 supporting 82,000+ jobs. As compiled in the firm's South Carolina analysis.
- U.S. Census Bureau, Vintage 2024 Population Estimates: South Carolina the fastest-growing U.S. state by percentage in 2023–24 and 2024–25; Horry County (Grand Strand) up ~3.2% to 427,551, among the fastest-growing U.S. metros. As compiled in the firm's South Carolina analysis.
- Palmetto Promise Institute citing the Lincoln Institute of Land Policy; S.C. Constitution Article X; S.C. Department of Revenue; Act 388 (2006): commercial, rental, and non-owner-occupied property assessed at a 6% ratio versus 4% for owner-occupied homes, so an income property can pay ~3.5x the tax of an identical residence. As compiled in the firm's South Carolina analysis.
- The Post and Courier “Rising Waters Lab,” citing NOAA and oceanographer William Sweet (2025): Charleston Harbor reached flood stage 54 times in 2024, one of the most active years in 100 years of records; NOAA projects roughly one additional foot of sea-level rise by 2050; hurricane, flood, and property-insurance costs must be stress-tested, with Hurricane Hugo (1989) as the benchmark. As compiled in the firm's South Carolina analysis.
- U.S. Small Business Administration, South Carolina District Office (Columbia); Business Development Corporation of S.C. and its affiliated Certified Development Corporation, and the Appalachian Development Corporation (Upstate), as the principal 504 channels; SBA Policy Notice decoupling the combined 7(a)-plus-504 ceiling to $10 million effective July 4, 2026. As compiled in the firm's South Carolina analysis.