Hotel owners face a variety of hotel financing options when looking to expand their business. These include hard money loans, construction loans, and Mezzanine financing. In this article, we’ll discuss how each type of loan can help your hotel’s growth and what to expect. We’ll also cover SBA loans, Mezzanine loans, and construction loans. If you have any questions, feel free to contact our hotel loan specialists.
Mezzanine financing
If you’re considering a hotel loan and want to finance it yourself, mezzanine financing is a great option. The mezzanine lender assumes a second lien on the hotel property and has similar lien rights to the senior loan. However, mezzanine debt is a riskier position and may resemble equity in some cases. In such cases, mezzanine lenders work well with the senior lender and they get comfortable with it through an intercreditor agreement that spells out their responsibilities in the event that the borrower defaults on the loan.
Mezzanine financing is a form of unsubordinated debt that can benefit any industry, but the hotel industry is an excellent example because it involves real estate and consumer-facing businesses. In addition to providing working capital, mezzanine financing can help hotel chains avoid many of the costs associated with traditional loans. Furthermore, mezzanine financing offers beneficial tax benefits. So, if you’re interested in expanding your hotel portfolio, mezzanine financing for hotel loans may be the best option.
Construction loans
Hotel construction loans with no recourse help hoteliers expand their borrowing power. A bank’s team of CMBS lenders books the loan on its balance sheet, and after the loan is closed, the bank sells the bonds to fund the loan. This process also helps the bank pass on the risk associated with hotel construction loans to a variety of parties. Generally, hotels can expect favorable loan terms when the loan originator has a significant stake in the project.
A hotel construction loan may include a combination of equity and debt financing. Large construction loans may be structured to cover a variety of hotel construction projects, from updating plumbing to developing untouched land. The cost of a hotel project can range from seven million to 35 million. In general, hotel construction loans should be large enough to cover the project costs and enable hotel owners to get a certificate of occupancy quickly. However, the loan amount must be sufficient to pay off debt and cover operating costs.
Hard money
Hotel loans are a good way to increase cash flow, but you must carefully examine the requirements to qualify for the best rates. Unlike a bank loan, you do not need to have excellent credit to qualify for a hard money loan. The amount of interest you pay is capped at a low percentage of the value of the loan. Hard money hotel loans can also be advantageous for owners with low credit scores because they do not require collateral, and they are government-backed.
A hard money lender will only approve you for a hotel loan if you can provide a down payment of 10% to 50%. Your down payment will depend on the property’s ARV and the risk factor of the deal. Some lenders will finance the entire amount of the loan with no down payment. Although the interest rate is high, some lenders may finance the entire amount. However, make sure you know your risks before applying for a hard money loan.
SBA loans
SBA hotel loans are one type of commercial real estate financing that are often available for owners of hotels. Before you apply for a hotel loan, you should first determine how much you need. You can either estimate your requirements or overestimate. Then, you can compare various loan programs to find the one that fits your needs best. Here are some tips to help you find an SBA hotel loan:
A bank will generally lend up to 75% of the value of your property. This type of financing is designed for independent, non-franchise hotels. There are no firm property age requirements. The bank will look for a good debt coverage ratio. If your hotel is a franchise, however, you can use the equity in your property to obtain a hotel loan. This type of loan is the best way to start a hotel and save money.
Owner financing
One of the ways to increase the cash flow in a hotel is to secure owner financing. Although this is not the norm, many sellers may be willing to extend a loan for the purchase of their property. Most of them are looking to get out from under the property and do not want to be financially liable for it. In these cases, the hotel is likely to be purchased for a fraction of the purchase price. However, in some cases, the seller may be willing to extend a lease-purchase agreement.
Hotel lenders will typically require periodic funding of a capital reserve. This capital reserve will typically be between two and three percent of the hotel’s gross revenues. The capital reserve disbursement conditions are spelled out in the loan documents. For instance, if the owner is seeking to make capital improvements, a hotel lender may restrict the use of the capital reserve to budgeted projects, such as new rooms. Likewise, if the owner plans on making improvements, the lender may limit the use of the capital reserve to maintenance projects and budgeted expenses.
