The hotel industry is, and it is not for no reason that people say running a successful hotel business is not everybody’s cup of tea. The returns of running a successful hotel business are very attractive, but so are the risks. It is quite true that hotel businesses are high-risk, high-reward deals.
If you’re looking into entering the hotel business or are already running one and are confused about your financing options, this blog is for you. Read on to understand the nuances of financing or refinancing your hotel business financial needs.
Whether you’re looking to build, buy, renovate or refinance your hotel or motel, there are a plethora of commercial real estate loans you can choose from.
The four mainstream types of hotel financing loans are SBA 504 loans, SBA 7a loans, conventional bank loans, and USDA B & I loan. This blog is an outline about the features of hotel loans, qualifying conditions to avail a hotel loan and the comparisons between various types of loans which will give you a clear picture of the best options you have out there.
Basics about commercial real estate hotel loans
Commercial real estate hotel loans are a combination of a business loan and a real estate loan. In order to obtain any loan on the property of your hotel or motel, you will be required to pledge the real estate of your hotel as a collateral, thus, you need to be able to approve the nature of business and prove to the lenders about the validity of your hotel as a profitable business venture, thus expressing your loan repaying abilities.
What are the areas where you will typically need hotel financing?
Here are some cases where you will generally need some financing help with your hotel or motel business:
• A new loan to take care of the extensive repairs, renovations and maintenance of your hotel – In many cases when it comes to the hotel business, business owners will need to take care of the repairs and maintenance from time to time. The very nature of hotel businesses is that these places need to have that perfect ambiance that can provide their customers with a delightful experience.
Also, since there will be hundreds of walk-ins every day and the in house staff in itself for many hotels will be quite large in number, the wear, and tear of carpets, walls, beds are too common and hotels will need a complete replacement of many things every 4 to 5 years generally. Thus, the repairs and maintenance charges for hotels and motels are quite a recurring nature of the expense, and you will need commercial real estate hotel financing options here.
• A new loan to refinance your current hotel loan – The next typical case where a hotel loan makes the best sense is when you want a refinancing plan to pay off your existing mortgage. Hotels usually are started and even run based on the loans taken, and as a business owner, you will need to keep looking out for options through which you can pay off your old loan and clear off your existing loan liabilities.
This is especially important because hotel loans are usually provided by having the real estate of the property as collateral and the banks can take over your hotel in case of default in the repayment of a loan. Thus, taking a new loan to pay off an existing loan is most common in hotel businesses.
The best type of loan in this particular scenario would be a commercial real estate bridge loan. A commercial real estate bridge loan typically bridges the financial gap for you and provides you an immediate funding option to take care of your outstanding existing financial obligations, in this case, paying off your old loan. If you are in a similar situation, check out and explore the plethora of commercial real estate bridge loan lenders and make the best pick to get the best deals for your hotel refinancing needs.
• To buy a new hotel acquisition – It is quite common in the hotel industry to acquire the new buildings that show up around, make some minor repairs and renovations, and add this property to the chain of hotels, restaurants or motels of your business. So, using commercial real estate bridge loans is again one of the best ways of financing your new hotel acquisition as it will cover your financial needs until your new hotel starts providing you returns. If you are looking for bridge commercial real estate loans Houston, get in touch with us by writing to us or calling us up, and our team of experienced real estate agents will help you out, be it making the best investment decision or choosing the right kind of loan to finance your needs.
• To purchase new equipment for the hotel that adds to the aesthetics of the hotel, or otherwise helps in improving the overall service of your hotel or motel – The next situation where hotel financing would be needed is in purchasing new types of equipment, like crockery and kitchenware or paintings, etc. which will either add up to the aesthetics of your hotel or in some way improve the overall customer experience at your hotel.
This is again a situation where spending some funds today, will help you gain higher returns tomorrow, and a typical case where financial bridging might be necessary. Still, commercial Real Estate bridge loans will be your best bet here.
The three most common and sought-after types of hotel loans and their corresponding features
Number 1 – Conventional bank loans
Conventional bank loans, as the name suggests is a more traditional form of hotel financing, which is still very relevant and equally useful as other types of loans. These loans are best suited for strong real estate borrowers who already have solid banking relationships with their lender banks. These are usually an option for people who’ve been in the business of the hotel industry for a while and been around since some time. The typical features of these loans are as under:
• There is no limit on the size of the loan that an investor can avail while opting for traditional bank loans. Banks generally decide the amount based on the credit score of the borrower, the practicalities of the loan approval, the performance of the borrower’s hotel business and other things on similar lines.
• The term of these loans would be from 2 years and can extend up to 25 years, and sometimes even beyond that.
• The interest rates would range between 5% to 7% and can vary depending upon the relationship between the borrower and the lending banks.
Number 2 – SBA 504 loans
SBA 504 loans are the right fit for those hotel business owners and investors who are looking for massive larger funding projects where conventional bank loans are not an option. These are usually huge loans and are traditionally opted out by savvy hotel business owners or a group of hotel business owners, where traditional bank loans do not make much sense. The typical features of these loans are as under:
• The size of the loan would be up to $20M
• The term of these loans ranges anywhere between 10 and 20 years.
• The rates would be up to 3.75% for the CDC portion and up-to 5% for bank portion.
Number 3 – SBA 7a loans
These loans are the perfect fit for investors who invest in smaller commercial real estate projects. These aren’t as massive as SBA 504 loans, nor fall into the category of hotel owners who have reliable connections with the lender banks and have been around in the business of hotel industry since a while. These are go-to loans for beginners who are just starting to invest in hotel businesses. The typical features of these loans are as under:
• Firstly, the size of these loans is generally up-to $5M.
• The term of the loan can go up to 25 years.
• The rates of these loans will lie between 5.75% to 7%.
What are the qualifications needed for you to avail any of the above hotel loans?
Regardless of the type of hotel financing that makes the best sense for you, the qualifications needed for you to be able to avail any of the above types of hotel loans are quite similar. Here are the top 5 qualification criteria you need to pass to avail a hotel commercial real estate bridge loan.
1. You should be able to make a cash down payment of at least 10% of the overall value of financial need you are looking for from banks or commercial Real Estate bridge loan lenders.
2. You should have a credit score of above 680 to be able to process these loans.
3. Must be running your hotel business from the past three years at the minimum. This is to assure the lenders that you have quite a good amount of experience and expertise in your, and they can lay trust on you with your loan repayment abilities.
4. Should not have any recent bankruptcies, foreclosures or tax liens. These things speak a great deal when potential lenders are judging your credit-worthiness, and it is important to not have any bankruptcies in the recent past.
5. A solid business debt service coverage ratio of or above 1.20.
So, these are the 5 essential criteria for you to qualify for commercial real estate hotel loans. Remember that, the hotel industry is a beautiful mix of business and real estate, and thus, you will have plenty of loan options to choose from. Consulting professionals are therefore highly advised, so you don’t make expensive mistakes.
For expert help and guidance that is timely and highly valuable, reach out to our commercial real estate agents at Private capital investors, and we will help you make the best investment and financing decisions!