Case Study · Texas · Limited-Service Hotel · SBA 504
Limited-Service Hotel Feasibility Study, Texas — An SBA 504 Worked Case
This is how our independent feasibility study company and hotel feasibility consultant team analyzed a new-build, roughly 100-key select-service flagged hotel underwritten to an SBA 504 credit — from the STR competitive-set penetration read through the debt-service coverage a lender must document across a two-to-three-year ramp. It is a representative, anonymized worked example of the methodology — not a specific client deal — set on an interstate corridor in a growing Texas metro.
A flagged select-service hotel on a Texas interstate corridor.
A sponsor came to our feasibility study company with a ground-up hotel and an SBA 504 lender that needed the projected cash flow independently tested before it would commit. The subject is a new-build, roughly 100-key select-service, upper-midscale flagged hotel on a two-and-a-half acre pad at an interstate interchange, in a fast-growing outer-ring submarket of a major Texas metro. The build is a select-service (limited-service) format — branded guestrooms, complimentary breakfast, a small meeting room and a pool, and a lean operating model — not a full-service box.
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 stabilized occupancy and rate, and cover this specific debt.”12 Hotels are also named special-purpose properties under SBA rules, which is precisely the condition that turns a discretionary feasibility study into an expected one on a ground-up deal, and the flag must be listed in the SBA Franchise Directory.10 Our scope as the feasibility consultant was the independent demand, penetration, competition, and debt-service analysis that supports that credit.
Penetration, not an occupancy guess.
The demand read is an STR competitive-set penetration analysis. The subject's fair share is benchmarked against a defined competitive set, then a penetration ramp is projected to stabilization — the core test in hotel feasibility, and the one lenders scrutinize most.
The competitive-set RevPAR index is a hotel's RevPAR divided by the RevPAR of its defined competitive set, where 100 percent is fair share.7 The national frame is a stabilized U.S. hotel occupancy of 62.3 percent, an ADR of $160.54, and a RevPAR of $100.02 for full-year 2025, the first occupancy and RevPAR declines since 2020.4 Against the surveyed competitive set, the subject stabilizes near 73 percent occupancy and a $165 ADR — a RevPAR near $120, or roughly 110 percent of the set's fair share. That modest premium is earned, not assumed: it reflects the newest physical product, a strong reservation and loyalty contribution from the flag, and the best interchange visibility on the corridor. Critically, the study does not assume above-fair-share penetration on day one — the classic failure mode. It grades the index up a ramp of about 78 percent in Year 1, 96 percent in Year 2, and 110 percent at stabilization, consistent with STR evidence that new-construction hotels open near a 58 percent occupancy index in month one and reach a 100 percent RevPAR index only around month 17, with an average build-up to stabilization of roughly three years.6
| Demand driver | Basis | Supported figure |
|---|---|---|
| Competitive set | 6 flagged limited/select-service hotels, ~648 rooms within ~3 mi | Fair-share benchmark |
| Corridor demand generators | Interstate traffic, business/distribution parks, regional medical, events | Weekday + compression capture |
| Stabilized occupancy | 73% (vs ~62.3% U.S. 2025)4 | ≈ 26,645 occupied room-nights |
| Stabilized ADR | Newest flagged product premium (vs U.S. $160.54)4 | ≈ $165 |
| RevPAR penetration index | Subject ~$120 ÷ comp-set ~$1107 | ≈ 110% of fair share |
Occupancy and RevPAR logic grounded in CoStar/STR national data and the competitive-set penetration index; see sources 4, 6, and 7. Figures are illustrative of the engagement type.
Six flags in the set, and a pipeline that must be scanned.
Six flagged hotels sit within three miles, one within a mile, but the corridor's demand generators and the subject's newest-product position support a modest above-fair-share penetration — provided the pipeline is scanned, because Texas leads the country in hotel supply.
| Hotel | Flag tier | Rooms | Distance | Read |
|---|---|---|---|---|
| Comp A | Upper-midscale | 105 | 0.7 mi | Nearest peer; solid RevPAR, aging soft goods |
| Comp B | Midscale | 88 | 1.3 mi | Interior-corridor, value segment |
| Comp C | Upscale select-service | 135 | 1.9 mi | Rate leader; corporate/group base |
| Comp D | Economy | 92 | 2.4 mi | Price-led, low ADR, weak weekday |
| Comp E | Extended-stay | 118 | 2.7 mi | Adjacent segment; partial overlap |
| Comp F | Upper-midscale | 110 | 3.0 mi | PIP due; trailing-edge product |
Competitive set surveyed for the engagement; anonymized, ~648 rooms aggregate. Announced and permitted supply was scanned, not just the standing set, consistent with institutional feasibility practice.
The subject enters as the newest, best-located product with a strong flag, against a set whose leading peers are either aging into a Property Improvement Plan or positioned in adjacent segments. That supports the ~110 percent stabilized penetration — but only after the pipeline is scanned. A rigorous study does not stop at the standing set: it tests announced and permitted supply, because a competing flag opening nearby during lease-up can permanently reset the penetration assumption, and that risk is acute in Texas.8 Dallas leads the entire U.S. hotel construction pipeline at a record near 24,497 rooms, and Austin ranks fifth nationally, so new supply is a first-order variable a Texas hotel study must price.8 Here the site sits at a secondary interchange, not a downtown core where the pipeline concentrates, and the scan found no directly competitive flagged project permitted inside the trade area during the ramp — which is what lets the model carry an above-fair-share index rather than a defensive one.
Texas macro: a demand tailwind against a supply headwind.
The state backdrop is a tailwind for a corridor select-service hotel, tempered by lodging supply. Texas is the nation's second-largest economy at roughly $2.9 trillion of GDP, and more than 90 percent of Texans live in metropolitan counties.
Texas held about 31.3 million residents as of July 2024 and continues to lead the country in in-migration; the Houston metro alone added more than 198,000 residents in a single year, and exurban cities on the metro edges are among the fastest-growing in the nation.1 That rooftop and employment growth on the outer ring is exactly the demand engine a new select-service hotel needs. The state also carries no personal income tax and, for most asset classes, no general Certificate of Need regime, so lodging supply is set by the market rather than a permit gate.2 Texas ranks second nationally in SBA 7(a) volume and is served by six SBA district offices, so the SBA channel here is deep.3
The offsetting reality is supply. Dallas led the entire U.S. hotel construction pipeline at a record near 24,497 rooms and Austin ranked fifth as of late 2025, even as Texas metros posted softening revenue-per-available-room through the year — Houston finished 2025 at a 58.9 percent occupancy, an 8.6 percent decline and the steepest among the top 25 markets.11 The feasibility test therefore turns on penetration and coverage against a well-supplied market, not on optimistic top-line growth. Nationally, new supply grew only about 1.3 percent in 2025, well below the long-run 2 percent, which supports existing-hotel performance, but that restraint is uneven and the Sun Belt carries the concentration.8 Two recent changes cut in the sponsor's favor: the Texas business personal property tax exemption rose to $125,000 per location effective January 1, 2026, and the SBA's combined 7(a)-plus-504 ceiling doubled to $10 million effective July 4, 2026, enlarging bankable deal size.3
Why the interchange captures the corridor.
Demand generators, visibility, and growth all point the same direction, and the interchange geometry converts corridor traffic into room-nights.
The site is a hard corner at an interstate interchange with full visibility from the highway, adjacent to a durable weekday demand base — a cluster of business and distribution parks, a regional medical campus, and a corridor of contract and project accounts — layered over weekend leisure and event demand that fills the shoulder nights. That mix is the ideal profile for a select-service flag: mid-week corporate and contract business at rate, weekend transient and event compression, and a growing exurban base that trailing STR data understate because household and employment growth on the outer ring runs well ahead of the trailing count.1
Geometry and product do the rest. The subject occupies the most visible pad at the interchange, the newest flagged box in the trade area, with a reservation and loyalty contribution the aging peers cannot match. That is why the model credits it with a top-of-set, roughly 110 percent penetration at stabilization — not more. A defensible study caps the premium at what the product, flag, and location actually justify and grades the ramp to it, rather than assuming a stabilized index from opening, which is the single most common way a hotel pro forma fails review.6
The SBA 504 structure.
Total project cost lands at $16.5 million. The 504 program finances the real estate and FF&E through a bank first mortgage plus a long-term, fixed-rate CDC/SBA debenture, which is why an owner-operated, fixed-asset ground-up hotel routes here.
| Cost component | Amount |
|---|---|
| Land (~2.5-acre interchange pad) | $1.65M |
| Site work & utilities | $1.30M |
| Building shell & structure (100 keys) | $8.40M |
| FF&E (guestrooms & public space) | $2.10M |
| Brand fee, PIP-equivalent & pre-opening | $0.85M |
| Soft costs, A&E & contingency | $1.35M |
| Working capital, interest reserve & financing fees | $0.85M |
| Total project cost | $16.50M |
All-in cost near $165,000 per key sits below the national select-service median around $223,000 and in line with efficient Texas limited-service construction near $167,000 per key. See source 5.
| Item | Figure |
|---|---|
| Bank first mortgage (50%) | $8.25M @ ~9.5%, 25-yr amortization |
| SBA 504 CDC/SBA debenture (30%) | $4.95M @ ~6.5% fixed, 25-yr |
| Borrower equity injection (20%) | $3.30M |
| Annual debt service, bank | $8.25M × ~0.1048 ≈ $865k |
| Annual debt service, debenture | $4.95M × ~0.0810 ≈ $401k |
| Total annual debt service | ≈ $1.27M |
Structure per SBA 504 conventions under SOP 50 10 8; owner-occupancy 60% for new construction; debenture below the single-project cap; combined 7(a)-plus-504 ceiling $10M from July 4, 2026. See sources 3 and 10.
The equity injection sits at 20 percent, not the 10 percent 504 baseline, and that is the rule, not a cushion: SBA escalates the required injection to 15 percent for a special-purpose property and to 20 percent when the project is also a start-up, and a ground-up hotel is both.10 The 50 / 30 / 20 split follows directly — a conventional bank first mortgage at 50 percent, a fixed-rate CDC/SBA debenture at 30 percent, and the sponsor's $3.30 million at 20 percent. At $4.95 million the debenture also sits below the single-project cap, and the combined 7(a)-plus-504 ceiling doubled to $10 million in July 2026, so the structure works cleanly.3 On the blended debt of $13.20 million — the bank note at roughly 9.5 percent over a 25-year amortization and the debenture near 6.5 percent fixed — total annual debt service is about $1.27 million, the number the projected coverage has to clear. Because the hotel is a special-purpose property, a third-party feasibility study is expected for the credit and the flag must be confirmed in the SBA Franchise Directory; this study is that deliverable, tested against an independent read of penetration rather than the sponsor's own projection.10
Feasible and bankable, on coverage the credit can document.
The stabilized model builds from rooms and other revenue, nets departmental and undistributed operating expense, the franchise load, management, and an FF&E reserve, and carries coverage to 1.40x by Year 3 across a deliberately graded ramp.
| Line | Basis | Amount |
|---|---|---|
| Rooms revenue | 100 keys × 73% occ × $165 ADR (~$120 RevPAR) | ≈ $4.40M |
| Other operated revenue | Breakfast/F&B, meeting space, other (~8%) | ≈ $0.38M |
| Total revenue | Rooms + other | ≈ $4.78M |
| Departmental expenses | Rooms & other-department operating cost | ≈ ($1.14M) |
| Undistributed operating expenses | A&G, sales & marketing, IT, utilities, R&M | ≈ ($0.83M) |
| Franchise & brand fees | ~10% of rooms revenue9 | ≈ ($0.44M) |
| Gross operating profit (GOP) | ~50% of revenue7 | ≈ $2.37M |
| Management fee, property tax & insurance, FF&E reserve | ~3.5% mgmt + fixed charges + ~4% reserve5 | ≈ ($0.60M) |
| Net operating income (NOI) | Available for debt service | ≈ $1.77M |
Margins consistent with limited/select-service GOP near 45–55% and EBITDA near 35–45%; franchise load ~10–14% of room revenue and an FF&E reserve of 3–5% of revenue. See sources 5, 7, and 9.
| Year | Stage | Occ / ADR | RevPAR | NOI | DSCR |
|---|---|---|---|---|---|
| Year 1 | Ramp / opening | 59% / $150 | ~$88 | ~$1.14M | 0.90 |
| Year 2 | Building | 68% / $158 | ~$107 | ~$1.49M | 1.18 |
| Year 3 | Stabilized | 73% / $165 | ~$120 | ~$1.77M | 1.40 |
Debt service held at the fully amortizing ~$1.27M; the Year-1 shortfall is funded by a capitalized interest reserve sized into the project. DSCR = NOI ÷ debt service. See source 10 for the ~1.15–1.25x 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 convention with real headroom.10 By Year 2 the project already covers fully amortizing debt service at 1.18x. The Year 1 figure of 0.90x is intentionally below 1.0 — it is the ramp year — which is exactly why the structure carries a capitalized interest reserve through stabilization: the reserve covers the ramp, and permanent coverage is measured once the hotel penetrates its competitive set. Modeling a stabilized index at opening, or best-in-class ADR on day one, is the most common way these pro formas fail review; the ramp here is deliberately graded to the STR build-up curve — an occupancy index near 58 percent in month one, a 100 percent RevPAR index around month 17, and stabilization near year three.6
On the equity side, the $3.30 million injection earns growing levered free cash flow — effectively covered by the interest reserve in the ramp year, building to about $500,000 a year once stabilized and net of the FF&E reserve, a roughly 15 percent cash-on-cash yield. The exit is valued on a going-concern basis, not a leased-fee cap rate: a hotel is an owner-operated business, and capitalizing a Year-10 stabilized NOI near $2.1 million at a going-concern overall rate around 8.5 percent — within the roughly 7.3-to-8.1 percent range for hotels overall and the wider 8.6-to-13.1 percent range for economy and midscale product — implies a gross sale near $24.7 million, and roughly $12.6 million of net equity after selling costs and the outstanding bank and debenture balances.9 Holding ADR growth to roughly the pace of inflation rather than an aggressive rate ramp, the blended result is an illustrative levered equity IRR of about 18 percent over a 10-year hold.4
Verdict: financially feasible and bankable. On independently derived penetration, a stabilized 1.40x DSCR, and a ~18% levered equity IRR, the projections support the SBA 504 credit.
Independent penetration, ramp, competition, 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 derived stabilized occupancy and ADR from the surveyed competitive set and a graded penetration ramp, rather than assuming a stabilized index from opening, and we modeled the franchise-fee load, a management fee, and an FF&E reserve so distributable cash flow is not overstated — the recurring omissions that sink hotel pro formas.
The coverage analysis was then stress-tested. We ran the debt-service coverage against a competitor opening mid-ramp and against ADR softness — the two variables a Sun Belt hotel is most exposed to — to confirm the credit still holds when penetration or rate compress. One scope boundary is worth stating plainly: as the feasibility consultant, we reference, but do not perform, the Phase I environmental site assessment; that is a separate environmental professional's engagement that runs in parallel to the study.12 That combination — independent penetration, a graded ramp, a scanned competitive set, and a stressed DSCR — is what lets the lender rely on the file.
Underwriting a Texas hotel for an SBA 504 loan? Start with the feasibility study.
Feasibility Study Company prepares independent hotel and hospitality feasibility and market studies for SBA 7(a) and 504 credits, built to the penetration and coverage standard your lender must document. A methodology briefing walks through the STR competitive-set, ramp, and DSCR analysis behind a case like this one, calibrated to your corridor, flag, and segment.
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 Texas, Hotel & Hospitality, and SBA 7(a) & 504 analyses and the primary authorities they cite.
- U.S. Census Bureau, Vintage 2024 Population Estimates (Texas population ~31.3 million as of July 1, 2024; Texas leads the nation in in-migration; the Houston metro added more than 198,000 residents in 2023–24; exurban Texas cities among the fastest-growing nationally), as compiled in the firm's Texas market analysis.
- Texas Comptroller of Public Accounts, Texas economy and GDP data (Texas the 2nd-largest U.S. economy, ~$2.9 trillion GDP; 90%+ of Texans in metropolitan counties; no state personal income tax); National Conference of State Legislatures on Certificate of Need (Texas has no general CON law).
- U.S. Small Business Administration, Texas district office directory (six district offices; Texas ranks #2 nationally in SBA 7(a) volume); SBA combined 7(a)-plus-504 loan-cap increase to $10 million effective July 4, 2026; Texas business personal property tax exemption raised to $125,000 per location effective January 1, 2026 (Texas Proposition 9 / HB 9).
- 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); New York City leading the top 25 markets; 2019 baseline occupancy 66.1%; ADR now growing below the rate of inflation per CoStar / Tourism Economics.
- 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; all-type median ~$219,000); the going-concern income approach; an FF&E reserve of 3%–5% of revenue.
- STR (Hotel Data Conference) and Cornell University / ISHC (John O'Neill): 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 (3.08 years), with top-25 markets stabilizing faster than smaller markets; brand-managed hotels ramp faster than independents.
- STR/CoStar chain-scale and service-model data via MMCG analysis: the competitive-set RevPAR index (penetration / fair share, where 100% is fair share); limited-service GOP margins ~45%–55% and EBITDA ~35%–45%; economy and midscale tiers occupancy 54.4%, ADR ~$86, RevPAR ~$47. Proprietary single-provider; treated as indicative.
- Lodging Econometrics, Q4 2025 U.S. Construction Pipeline Trend Report (January 2026): 640 hotels / 74,079 rooms opened in 2025 (census supply growth ~1.3%); Dallas the largest U.S. market pipeline (record ~24,497 rooms, Q2 2025), with Atlanta, Nashville, Austin, and Phoenix following, and Austin fifth nationally.
- CBRE Hotels Research, Trends survey and H2 2025 Cap Rate Survey: full-service GOP margin 33.5% (2024); combined franchise/brand fees roughly 10%–14% of room revenue; 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 (CoStar).
- U.S. Small Business Administration SOP 50 10 8 (effective June 1, 2025) and 13 CFR 120.160(b): hotels named special-purpose properties requiring a third-party feasibility study for virtually all 7(a)/504 applications; the 504 structure of bank first mortgage, CDC/SBA debenture, and borrower equity; owner-occupancy of 60% for new construction; equity of 15% (special-purpose) or 20% (special-purpose and startup); the SBA Franchise Directory reinstated (the flag must be listed); a typical ~1.15x–1.25x minimum hotel DSCR; record 7(a) volume of $37.3 billion in FY2025.
- CoStar full-year 2025 and Lodging Econometrics via the firm's Texas analysis: Texas metros posting softening RevPAR through 2025; Houston full-year 2025 occupancy 58.9% (down 8.6%, the steepest decline among the top 25 markets); Dallas and Austin among the highest U.S. hotel pipelines.
- SBA SOP 50 10 8 going-concern appraisal requirements for special-purpose property (a state-Certified General appraiser allocating value among real estate, FF&E, and intangibles) and hotel going-concern valuation practice (the income approach on stabilized NOI net of a management fee and FF&E reserve; USPAP; value allocation near real estate 60–75%, FF&E 10–20%, intangible 10–25%); ASTM E1527-21 Phase I ESA referenced but performed by a separate environmental professional.