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Unpacking Hotel Financing: What it’s All About

November 14, 2023
Hotel Financing Credit Suite

Are you in the hospitality industry? You can get hotel financing to execute your property improvement plan or even build a new hotel.

Hotel lenders offer several choices for capital and more. From Choice Hotels to a small hotel business just getting off the ground, there is financing available.

Hotel Financing Options Available

Type 1 – CMBS Loans

These loans, also known as commercial mortgage-backed securities loans, can be a great option for buying hotels, renovating of an extant hotel, or refinancing existing loans.

The way they work is, they convert your mortgage into bonds after you successfully purchase a new property. Investors then buy these bonds.

These loans will tend to start at $2 million in funding and 5 – 10 year fixed interest rate terms with 25 – 30 year amortization periods.

One of their strongest advantages is they don’t require excellent credit to qualify. They’re also non-recourse loans, meaning lenders can’t take you to court if you fail to repay the loan.

However, they also often come with prepayment penalties and may require you to buy securities as collateral.

Type 2 – SBA 7a Loan or SBA 504 Loan

This SBA loan can provide up to $5 million in funding. You can apply it to starting a new hotel business, or buying an existing hospitality property.

Or use it to renovate old buildings, or as a hotel construction loan.  You can also use it for buying hotel equipment and supplies and refinancing exiHotel Financing Credit Suitesting debt.

Requirements include having acceptable credit scores and insurance coverage. Loan terms range from 10 – 25 years.

The SBA 504 loan provides up to $5 million in funding you can apply to buying or financing commercial realty purchases, hotel property construction, building materials and equipment, and renovation expenses.

These acceptable uses are like the 7(a), except for buying inventory, refinancing debt, funding working capital, and investing in rental realty

One requirement for qualification is an in-depth review of your business’s financial statements.

Type 3 – A Bridge Loan

Commercial bridge loans provide funding between the time owners buy a hotel and the time they get more permanent financing to pay for it. Hence the term, bridge for this type of hotel loan.

Access capital during this gap to keep operations running or take advantage of new business opportunities.

In exchange for financing, these commercial real estate loans tend to charge high-interest rates (often 8.5% – 10.5%). You must repay them in 12 months at the latest. A hotel owner must also provide the hotel being bought as collateral.

However, this kind of hotel loan often has a fast approval time. And it can provide some much-needed capital if you plan a repayment strategy well. Repaying intentionally can also help you avoid the real problem with these loans—high-interest rates.

Type 4 – Mezzanine Financing

A mezzanine loan is a hybrid of debt and equity financing. It gives the hotel lender the right to convert the debt to an equity interest in the company in case of default.

For the most part, this is, after venture capital companies and other senior lenders are paid. In terms of risk, it is between senior debt and equity.

Mezzanine debt has embedded equity instruments. These are often called warrants. They are attached and increase the value of the subordinated debt and allow greater flexibility when dealing with bondholders.

Mezzanine financing is often associated with acquisitions and buyouts. You can use it to prioritize new owners ahead of existing owners in case of bankruptcy.

Because this is unsecured debt, the interest rate is high.

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Best Hotel Financing Providers

Hotel Financing Provider 1 – Commercial Construction Loans Through Avana Capital

Avana Capital offers commercial construction loans for capital improvements, expansion, and building a hotel from the ground up. You will need to put down between 10% and 30%. They offer options for refinancing.

Get an SBA 504 loan, bridge lending, or conventional loan with a low loan-to-value ratio.

They also offer alternative investment options in commercial debt. This includes lending to cover ecologically responsible construction and improvement projects (such as solar panels) via their Avana Fund.

Avana offers $2 million to $50 million to finance these kinds of projects. These include acquisition, refinance, clean energy, modular construction, and C-PACE (commercial property assessed clean energy) loans.

Via the Avana Fund, get conventional and construction lending with a 70% loan to value; SBA 504 loans with up to 90% loan to value; and bridge, acquisition, and refinance lending with up to 75% LTV.

Hotel Financing Provider 2 – Get SBA Financing Through Lendio

Lendio is an online lender. Your small business can get an SBA 7a or a 504 loan through them, and get up to $5 million in hospitality industry working capital.

To get SBA financing, you will need to have a personal credit score of 600 or higher. Therefore, this is not a good financing option for a business owner with poor credit.

Your monthly revenue needs to be $8,000 or more. And you need to have been in business for at least two years.

If you are not yet qualified for these hotel financing options, Lendio will work with you. They offer accounting software tools to help your small business better keep track of your taxes, accounts receivable, and more.

In addition to the above, they also offer SBA microloans. It only goes up to $50,000, so consider it a hotel loan to buy equipment or inventory.

Hotel Financing Provider 3 – 7a Loans Through PMC Commercial Trust

PMC Commercial Trust offers realty lending through the SBA for $750,000 to $5 million. They are a non-bank lender authorized by the SBA to provide loans.

PMC is the lending subsidiary of Creative Media & Community Trust (CMCT) and a nationwide direct lender. CMCT’s operator, CIM Group, is a community-focused realty and infrastructure owner, operator, lender, and developer.

In particular, CIM works to make a positive change in communities and embraces social responsibility.

As with another lending from the Small Business Administration, hospitality businesses must be operated for a profit in the United States or its possessions and be categorized by the SBA as a small businesses.

Borrowers will need to fill out a pre-screening form online. They will generally provide a credit decision within five to seven business days after receiving a complete application.

Loan approval depends on a combination of many factors including credit, character, equity, and income.

Hotel Financing Provider 4 – Starbanco Business Finance

Starbanco offers several types of realty funding, including in the hotel industry.  Get commercial realty funding including bridge loans.

For real estate financing, get money to support the purchase, refinance, or cash-out – from $1 million to $25 million. Terms go up to 30 years. Get a loan to value (LTV) for up to 100%. They will take all asset classes as collateral.

There is no minimum required FICO score. Interest rates are based on transaction quality, credit, and location.

For bridge lending, get a loan with a value of up to 80%. The term is one to three years interest only. For this type of financing, they will only work with for-profit entities. Pay interest rates of as low as 7.5%. Get faster closings with this form of lending.

They also offer a small business loan for up to $5 million (it’s a term loan) and up to $25 million for mergers and acquisitions (M & A) financing.

Hotel Financing Provider 5 – EB-5 Construction Loan via Hall Structured Finance

EB-5 loans are for foreign investment companies doing business in the United States.

Hall Structured Finance offers loans of $20 million to $70 million for building. Get up to 75% in loan-to-cost ratio. For security on the loan, they will take a first mortgage lien on the subject property and pledge of ownership interests.

This is a non-recourse loan with a 36-month term. Closing will take 4 to 8 weeks from application and deposit remittance.

They also have a hotel bridge loan program. For that program, the property must be a currently existing hotel that is five years old or newer. Get a loan of $20 million to $80 million, with an LTV of up to 75%.

For a non-recourse loan, hotel owners may do well to work with a law firm like the Global Hospitality Group (Jeffer Mangels Butler & Mitchell LLP), to assure that their interests are being met properly.

Hotel Financing Provider 6 – Permanent Financing from the Popular Commercial Lending Group

The Popular Commercial Lending Group has permanent loans with fixed and floating rates starting at 4%. Get 5/10/15-year fixed rates with 25 – 30 year amortizations.

Loans run from $500,000 to $100 million with up to 75% loan to value. Closings take between 21 and 40 days. Get recourse and non-recourse loans. SBA lending is available. They will finance Vrbo and AirBnB.

Get a 30-year fixed-rate term loan. Mezzanine, joint venture equity (JV equity), and bridge financing are also available.

Or get bridge lending through them. Bridge rates run from 6% to 9%. Get 1 – 3 year terms with interest reserves. Loans go from 500,000 to $100 million with up to 80% loan to value for 100% of a property renovation.

Get fix and flip and construction loans, with 14 to 30 days to closing. Mezzanine and joint venture equity are available, along with recourse and non-recourse lending. They will finance Vrbo and AirBnB.

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How to Qualify for a Hotel Loan

For SBA hotel loans, you must meet the SBA’s qualifications, including having a good business credit score. It’s important to build business credit before talking to an SBA lender.

To become a business credit builder, you must get a business credit card, use it, and pay it off on time.

Banks are like the SBA in that they want to see solid financials and multiple years in business. Private lenders are more likely to want collateral to secure the hotel loan.

Alternative lenders often have less stringent qualification requirements. But they also tend to offer lower loan amounts. For the biggest loans from online lenders, you need a FICO score of at least the mid 600s, and annual revenue of $50,000 or more.

Hotel lenders also check metrics specific to the industry, like cash flow. This is money entering your business, minus money leaving it at a certain time. Positive numbers can show your business is financially healthy and can pay back any potential debt.

Debt service coverage ratio, or DSCR, compares cash flow to potential debt obligations. A higher ratio is better. DSCR is annual net operating income divided by potential annual debt payments for the loan.

Some lenders require a DSCR of 1.25, which means you have enough money coming in to pay your existing debts.

A lender will calculate LTV, which is the loan amount divided by the value of the property you want to buy or renovate. Commercial real estate lenders often offer loan amounts with LTVs of 65% to 85%, depending on the type of property and your business’s qualifications, etc.

What Can a Hotel Loan Be Used For?

Hotel Financing Credit SuiteHospitality expenses can be everything from soaps and toiletries to coffee makers, omelet stations, vacuum cleaners, lounge chairs, and bedbug treatment and prevention chemicals.

Because a hotel business loan’s primary purpose is to help hotel owners grow their business, beyond those expenses, here are more ways to use a hotel loan.

  • Buy land
  • Put up a new building (including materials and supplies for the building)
  • Relocate
  • Remodel (including materials and supplies for renovations)
  • Working capital
  • Hire additional staff
  • Fund operational expenses
  • Cover the purchase of a preexisting hotel
  • Refinance an existing hotel
  • Refinance for the purpose of getting cash out of the property
  • Buy new hospitality equipment

Business lines of credit and business credit cards are likely to be the most flexible forms of financing.

When it comes to a loan from the SBA, there are restrictions. You cannot use a 504 to buy inventory, refinance debt, fund working capital, or invest in rental land.

And you cannot use a 7a for land investments for a property that will be acquired primarily to use for sale, lease, or investment; to pay certain delinquent taxes, or to relocate out of the community when that will result in a net loss of job. There are some exceptions.

Because these loans are for a lot of money—and defaulting on CMBS loans and mezzanine funding can result in losing everything—hoteliers should review all expenses carefully and budget accordingly.

Just because you can get enough financing to, say, add a pool, does not mean that you should.

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Takeaways

There are several types of hotel lending available, often with positively hospitable rates and fees. Many of these are collateral loans, and often the property serves as the collateral. These loans are also for very high sums of money, sometimes up to $50 million.

Contact us today for more information and help in choosing the best form of hotel funding to fit your needs and the property.

About the author 

Janet Gershen-Siegel

Janet Gershen-Siegel is the seasoned Finance Writer and a former content manager at Credit Suite. She has been admitted to practice law for over 30 years, with a focus on litigation and product liability, and is a published author, with writing credits at Entrepreneur, FedSmith.com and BusinessingMag.com.

She has a BA in Philosophy from Boston University, a JD from the Delaware Law School of Widener University, and a MS in Interactive Media (Social Media) from Quinnipiac University.

She regularly writes for Credit Suite, which helps businesses improve Fundability™, build credit, and get approved for loans and credit lines.

Her specialties: business credit, business credit cards, business funding, crowdfunding, and law

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