HOTEL AND MOTEL LOANS
Conditions in the hotel and motel lending market had been good for several years leading up to the COVID pandemic, with strong profitability in the industry, low interest rates, and generally good credit availability. The unprecedented effect of the COVID pandemic caused many lenders to pause new lending in the industry. As credit availability has improved, the most likely source of financing for your project will continue be a specialized lender outside of your local market.
A long-term holdover of the Great Recession is that local, regional, and national banks have limited conventional lending capacity for many types of commercial real estate. This includes hotels and motels. In most geographic markets your local bank branches are not accepting applications for new conventional (i.e. not government-guaranteed) hotel and motel loans. If they are accepting applications, they are probably limited to working with hotel and motel operators who have an existing borrowing relationship with that bank.
SBA 7(A) LOANS FOR HOTELS AND MOTELS
Fortunately, there are specialized lenders who have a good appetite for hotel and motel lending outside of conventional lending markets. For projects below $5.0 million, SBA 7(a) financing continues to dominate the market. The SBA 7(a) program reduces the lender's risk of loss through a partial guaranty by the U.S. government. Equally important, this government guaranty allows the lender to fund a portion of the loan through investors in a secondary market instead of depending on their local deposit customers.
Here are some typical terms of SBA 7(a) loans for hotels and motels:
Loan Amount: $500,000 to $5.0 million
Loan Purpose: Purchases, refinances to reduce interest rates or monthly payment, refinances with new funds for renovations, new construction.
Collateral: First lien position on real estate and FF&E.
Interest Rate: Based on the Wall Street Journal Prime Rate, adjustable quarterly if the Prime Rate changes up or down.
Repayment Terms: Repayable over 25 years, no balloon payment (these terms are one of the main advantages of SBA 7(a) financing.
Loan-to-Value: Up to 80% of appraised value. Lenders will generally look for a down payment/cash injection of 10% to 20% of the project cost.
Franchise: Most lenders preferred franchised properties, but we also have lending sources for independent hotels and motels.
Construction Type: Some lenders prefer interior-corridor properties, but we have good lending sources for exterior-corridor properties as well.
Loan Availability: Good. As interest rates have trended higher the profitability of the subject hotel has become more important.
SBA 504 LOANS FOR HOTELS AND MOTELS
For hotel projects needing financing over $5.0 million, the SBA 504 program is a potential option. It is less widely-available than the SBA 7(a) program, but offers some attractive terms:
Loan Amount: Up to $12.0 million
Loan Purpose: Purchases, refinances to reduce interest rates or monthly payment, refinances with new funds for renovations, new construction.
Loan-to-Value: 80% of appraised value for hotels and motels. Lenders will look for a down payment/cash injection of 10% to 20% of the project cost.
Loan Structure: A conventional lender provides a first mortgage loan up to a 50% loan-to-value, and the SBA funds a second mortgage loan for another 30% - 35% of the project.
Collateral: First and second lien position on real estate and FF&E.
Interest Rate: The first mortgage lenders offer fixed and variable interest rates. The SBA-funded portion offers an attractive below -market fixed rate.
Repayment Terms: The first mortgage generally has a repayment period of 20 - 25 years. The SBA-funded portion has a repayment period of 20 or 25 years.
Franchise: Most lenders prefer franchised properties, but we also have lending sources for independent hotels and motels.
Construction Type: Lenders generally prefer interior-corridor properties.
Loan Availability: Good. As interest rates have trended higher the profitability of the subject hotel has become more important.
BRIDGE LOANS FOR HOTEL AND MOTELS
Bridge loans are available from private lenders for hotel purchase transactions. It is a more-expensive form of temporary financing, but it sometimes makes sense for opportunities with strong potential such as: (1) a hotel purchase at a discounted price which requires a quick closing (2 - 3 weeks), or (2) a discounted purchase of an under-performing hotel in need of a renovation or operational turn-around.
Here are typical bridge loan terms:
Loan Amount: $1.0 million and up
Loan Purpose: Purchases, purchase/refinances with new funds for renovations.
Loan-to-Value: 65% - 70% of lesser of appraised value or cost.
Collateral: First lien position on real estate and FF&E.
Interest Rate: Fixed interest rate in the range of 9% - 12%.
Repayment Terms: Interest-only payable monthly, balloon payment in 2 - 3 years.
Franchise: Most lenders preferred franchised properties.
Construction Type: Lenders generally prefer interior-corridor properties.
Loan Availability: Good. These lenders are primarily focused on collateral value, so financing may be available in situations where the loan-to-appraised value and loan-to-cost ratios are below 65% - 70%. With recent increases in interest rates, the pricing for bridge loans has become more competitive with other options.