Acquiring hotel loans can be as cyclical as the recurrent nature of a hotel itself. Real estate markets, the economy and tourism can affect the hotel industry and lenders are sensitive to many external but related factors when they issue credit for hotels. Whether a flagged hotel(franchised) or non-flagged hotel(independent) property, it is extremely important for hotel owners to obtain the right financing for the assets or loan purposes being sought.
Financing for hotels has traditionally been fairly broad and can include conventional and SBA loans, asset based loans, and other non-traditional funding options. Additionally, in the absence of traditional loan products unconventional funding sources have become increasingly utilized by hotel owners. The most common hotel loan purposes include: purchasing an existing hotel, start-up financing for a new hotel, construction financing, remodel, acquisition of real estate, refinance of real estate, and working capital. When it comes to finding hotel loans, operators will face several decisions from what loan product to what lender they should choose.
Hotel Loans: Which Loan Product Is Right For Me?
There are several loan and funding programs that have been used to finance hotels and motels, which can be structured with various interest rates and term options. Rates will be determined by the overall credit quality of the property and business, as well as the financial strength of the operator. Interest rates can be structured as variable, fixed or fixed to float. In the event that construction finance is requested lenders can structure an interest-only loan during the hotel construction period. The term and amortization is often structured anywhere between five and twenty-five years, depending on the assets being financed with the loan. Financing for hard assets such as the hotel property's real estate generally receive terms between fifteen and twenty-five years, while a loan for working capital and inventory could have a term of five to ten years. There are several loan products that borrowers should consider for hotel financing, including:
Conventional loans are typically made by community, regional and national banks and some non-bank lenders. These loans are not guaranteed by any third party and the bank or lenders assume the full risk of the loan. Therefore, credit standards are usually highest for conventional loans. Terms and pricing can be more flexible for conventional loans as lenders can price lower for stronger hotel loan requests. Many hotels work with their community banks to obtain financing and utilize the bank for depository services including checking, savings and cash management services.
The hotel industry has relied heavily on the Small Business Administration's (SBA) 7(a) and 504 loan programs, for various financing uses. With an SBA loan a percentage of the full loan, typically 75% is backed by the federal government so lenders assume less risk on the loan. However, all lenders utilizing SBA loan programs have to adhere to stringent loan eligibility requirements and SBA Standard Operating Procedures for loan underwriting. This includes the terms and pricing for the loan. For the SBA 7a product, loan rates are priced using the Prime Rate plus up to an additional 2.75% - which is the maximum the lender can set the rate at. Lenders typically use variable rate pricing so as the Prime Rate goes up or down the interest rate on the loan will move up or down as well. Terms are structured based on the assets being financed.
Asset Based Lines of Credit
Hotels may use asset based lines of credit for an array of business uses. Asset based financing for hotels can be either revolving or term loans secured by assets such as accounts receivable, or real estate. For more on Asset-based loans click here.
Unsecured Business Line of Credit
Unsecured credit refers to loans or lines of credit where there is no collateral to back the loan. Although this type of lending is possible for hotels it is considered risky for lenders. The borrower's personal financial strength as well as the business cash flow needs to be strong in order to qualify for an unsecured line or loan.
Merchant Cash Advance
The merchant cash advance (MCA) product is financing based on credit card receivables where the merchant cash provider will advance a loan based on historical credit card sales. This financing can only work for hotels that accept credit card payment. Merchant cash is considered short-term financing and can be funded quickly for businesses. Many hotel owners have utilized MCA funding to remodel their properties as required by their franchise Property Improvement Plans (PIP).
Seller Carry Financing
For buyers of an existing hotel it may be possible to negotiate financing with the seller. Instead of receiving the full purchase amount, the seller may be willing to finance all or part of the purchase price. In this scenario the buyer and seller negotiate the terms and interest rate of the loan. Typically sellers want to get paid out on the note within five years of the sale. One benefit of seller carry financing is that the seller will be supportive of the transition and should offer proper training to ensure that the buyer is successful taking the hotel operations over.
Credit Parameters for Hotel Loans
Hotel Lenders typically use very specific metrics when underwriting a hotel loan. Although these metrics are not fail-proof lenders utilize certain formulas to understand the historic and projected financial viability of a hotel property and the businesses ability to pay back the hotel loan. One such measure is the Revenue Per Available Room (RevPAR), which is calculated by multiplying the hotel's Average Daily Rate (ADR) by its Occupancy (OCC). RevPAR is typically compared to the historic numbers of a hotel property as well as with comparable hotels within it geographic area or peer group. Competitive analysis may include looking at occupancy, available rooms within a geographic area, average daily rate, market size, demographics, as well as tourist attractions and traffic count. Smith Travel Research allows hotel owners to obtain competitive information about other hotel properties as long as the requesting hotel owner submits information about their own property.
Since land and building is frequently included in a hotel financing request lenders will look at Loan To Value (LTV) which is a measure of available collateral. If the real estate is included in the finance request the lender will take a 1st mortgage or lien position on the real estate and a blanket lien on all business assets such as furniture, fixtures and equipment, and accounts receivables. Lenders may opt to establish the loan amount as low as 55% to a maximum of approximately 90% of the available collateral. Debt Service Coverage (DSCR) is a metric assessing the available cash-flow from the business to cover loan payments. Lenders typically prefer to see a minimum ratio of 1.25X or 1.35X available cash to the annual requested loan payments. The higher the ratio the better, as lenders like to have a sizeable cash cushion should a business see a drop in revenue. Given the cyclical nature of hotels and seasonality lenders will pay close attention to reviewing monthly cash flow from the business. The personal financial strength of the business owners will also be assessed by the lender. Lenders want to make sure that borrowers have enough cash to both inject into the deal as well as for any problems that might arise in the future. The personal credit of a borrower and how they have managed debt historically will be looked at by the lender through a consumer credit report.
Hotel Issues: Financing the Cost of Compliance
For flagged hotels Property Improvement Plans must be adhered to in order to remain a franchise partner with the brand. Improvements may include smaller items such as refreshing paint, wall coverings and carpet, however, larger improvements may include a re-imaging package , which can require a franchisee to upgrade the facade and roof of the building and replace the furniture in all rooms. PIP lists can range from several thousand dollars to hundreds of thousands of dollars.
One of the most recent developments are new provisions (March 15, 2012) in the Americans with Disabilities Act (ADA) that requires every hotel regardless of when it was built to be in compliance with various items including reservations, bathroom clearances, power mobility devices, vanity equity, service animals, parking, guestroom door signage, exercise equipment, service counters, saunas and steam rooms, pools and pool lifts, and play areas to name a few. The cost to the hotelier is not limited to the purchase of a device or piece of equipment or upgrade to the room, but extends to the ongoing operational costs of the program.
Apply for a Hotel Loan
Securing financing for a hotel depends largely upon the scale and purpose of the loan, but all such loans require comprehensive information on the business and the borrower - the loan application and checklist. This includes financial and tax records for the hotel, a detailed business plan and loan plan, projections of expected earnings, personal financial and tax records, as well as resumes for all purchasing parties, and a listing of all the hotel's assets and relevant documents detailing any proposed transactions involving the hotel.
You can apply for a hotel loan with one of the 3,600 lenders on BoeFly. A single loan request through BoeFly is the most efficient way to seek a hotel loan. Many individual banks or lenders can start the loan process, but BoeFly helps hotel owners by creating lender competition for their business, presenting an array of funding options, pricing and terms.
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