Updated November 13, 2026
Quick answer
A flag conversion is usually financed as a renovation of a hotel you already own, often with an SBA 7(a) loan. If at least 51% of proceeds go to real estate, the term can reach 25 years. The new brand must be on the SBA Franchise Directory, and you get its disclosure document at least 14 days before signing. Lenders size the loan on current cash flow. Axiant Partners, a broker in Boca Raton, finds hotel lenders. Typical ranges, not a quote.
What a Conversion Costs
Converting is a renovation project with a franchise attached. The hotel financing guide explains SBA eligibility for hotels; this page is about the conversion itself. Costs usually fall into five buckets:
- Conversion PIP: building work and FF&E to meet the new brand's standards.
- Signage and technology: exterior signs, property management and reservation systems, key cards and Wi-Fi.
- Initial franchise fee and any application fee, listed in the disclosure document.
- Exit costs if you're leaving a brand early. Read your current agreement for termination or liquidated damages clauses.
- Carrying costs: rooms out of service and a ramp-up period after the new flag goes up.
A conversion done as part of a purchase is underwritten with the purchase. See PIP financing with a purchase.
Franchise Rules That Set the Timeline
- Disclosure first. Under 16 CFR 436.2, the brand must give you its franchise disclosure document at least 14 calendar days before you sign or pay anything. Item 7 of that document estimates your initial investment, which is a good cross-check on your budget.
- Directory check. Under SBA SOP 50 10 8.1, a brand that meets the FTC franchise definition must be on the SBA Franchise Directory before an SBA lender can approve the loan. A new or smaller brand may not be listed yet.
- Signed agreement before funding. On a 7(a), the lender needs the executed franchise agreement before disbursing.
- Two agreements at once. If you still operate under the old brand at closing, every agreement that meets the FTC definition must be on the Directory, or the application can't proceed.
How an SBA Loan Can Fund It
Converting, expanding or renovating an existing building is an eligible use of SBA proceeds. If you already own the hotel, there's no change of ownership, so Appendix 15's purchase rules don't apply. Instead:
- Term. A loan with mixed uses can run up to 25 years if 51% or more of the proceeds go to real estate; otherwise the maturity is blended.
- Equity. The SOP's fixed 10% minimums apply to start-ups and changes of ownership. For an existing owner, the lender decides whether your equity and debt-to-worth are acceptable, so ask early.
- Construction rules. Work over $350,000 brings bonding or lender construction monitoring, and renovation triggers a historic review. See the PIP guide.
- Existing mortgage. Some owners refinance the current loan into the same SBA loan, which has its own eligibility rules. The 504 refinance program is one option for the real estate.
Worked Example: Converting a 64-Room Independent
Illustrative numbers, not a quote. An owner converts to a mid-scale brand. Building work is $520,000, FF&E and technology $260,000, an assumed initial franchise fee of $55,000 and $25,000 of soft costs. The hotel earns $610,000 of net operating income and pays $380,000 a year on its current mortgage. Rate assumed at 9.75%.
| Item | Amount |
|---|---|
| Conversion budget | $860,000 |
| Real estate share | 60.5% (51% or more allows up to 25 years) |
| Monthly payment over 25 years | $7,660 |
| Monthly payment over 10 years | $11,250 |
| Debt coverage today | 1.61x |
| Coverage, 25-year term | 1.29x |
| Coverage, 10-year term | 1.18x |
On today's income, the 25-year structure keeps coverage at 1.29x, above the 1.25x many lenders want. A 10-year term would drop it to 1.18x, below that line. Lenders count the post-conversion lift in room rate as upside, not as the way you repay. That's why the term matters more than the brand's rate projections.
Before You Sign With the New Brand
- Price the exit from your current agreement, if any.
- Read the FDD, especially Items 5, 6 and 7 on fees and investment.
- Confirm the brand is on the SBA Franchise Directory.
- Tag the budget as building work vs FF&E to check the 51% line.
- Talk to lenders before you sign. A franchise agreement with a fixed opening date and no funding in place is a risky place to be.
Rates for conversion loans follow the same market as other hotel loans: see hotel loan rates for 2026.
Talk to an SBA specialist: (561) 268-0465, or get matched with hotel lenders.
Frequently Asked Questions
What is a hotel flag conversion?
Changing a hotel's brand: an independent joining a brand, or a branded hotel switching to a different one. It usually comes with a new franchise agreement and a conversion PIP.
Can I use an SBA loan to convert my hotel to a franchise?
Often. Converting or renovating an existing building is an eligible use, and the new brand must be on the SBA Franchise Directory if it meets the FTC franchise definition.
How long can a conversion loan run?
If at least 51% of proceeds go to real estate and you aren't buying the business, up to 25 years. Otherwise the term is blended by use of proceeds.
Will a lender count the higher room rate after conversion?
Generally only as support. Lenders size the loan on current cash flow and treat the post-conversion lift as upside.
How much do I need to put in?
For an owner who isn't buying, the SOP sets no fixed percentage; the lender decides whether equity is adequate. Many will still want some cash in the project.
Sources & Further Reading
- SBA SOP 50 10 8.1 (effective October 1, 2026) — The SBA's rules for 7(a) and 504 loans, including equity injection, Appendix 15 on changes of ownership, and eligibility.
- 16 CFR 436.2: When the franchise disclosure document is due — The FDD must reach a prospective franchisee at least 14 calendar days before signing or paying.
- SBA Franchise Directory — The SBA's list of brands eligible for SBA financing; a brand that meets the FTC definition of a franchise must be listed.
- 13 CFR 120.212: Maturities of 7(a) loans — 25-year maximum, plus a period to complete construction or improvements on real property.
- SBA 7(a) Loans — Program overview and the $5 million maximum loan amount.
Figures above describe ranges commonly seen across lenders and reflect published guidance as of the date on this page. Confirm current terms with the cited source or your lender before acting.