Hotel loans and hotel financing has become much more limited in the last six months, but there still are options out there. Here are a few things to consider on increasing your chances of getting your hotel loan closed.
First of all, probably 60% maybe 80% of the lenders and banks that where offering hotel financing just a year ago, are now either out of business or are no longer accepting new applications. The reasons for this are many, from the banks having their own internal issues to not being able to sell the debt off onto the commercial secondary markets, etc. Bottom line, you’re reduced to only the banks/lenders that are still standing. It is critical to deal with these banks, and to get a better understanding of what they expect from you to get your hotel loan funded.
Hotel Loans Experience
Experience has always been really important with hotel loans, now it is becoming much more important. Two years of practical, onsite experience is the minimum. Lenders are looking at this more and more, and two years is many times not enough. As a potential solution for those that don’t meet this, is you can sometimes hire a third party hotel management company on a one to two year contract. Not all banks will accept this, a few will.
Another potential solution is to bring on a partner that meets this requirement. Obviously this is a complicated solution but can be a real home run from a financing perspective. Perhaps the potential partner has a higher net worth, liquidity, etc as well, so he’ll help with the entire loan request, not just with experience. The interesting thing is that with the real estate component of hotels, after a few years you can often refinance the debt a pay the partner off with the proceeds – so it can be a relatively clean buyout.
Hotel Financing – Stability
It is much easier to get a stabilized hotel financed than a renovation type deal. Perhaps the up side won’t be as attractive, but again from a financing perspective you will have a much better chance of getting the loan closed. Ideally what lenders want to see is two years of stable occupancy and or increasing trends and net income that can currently debt service at 1.3 to 1.35 (or more).
Interestingly, we have seen some turn around type hotels deals with purchase price low enough to meet the 1.35 DCR mentioned above. So you might be able to get that reduced price with still enough existing net income to service all of the expenses, proposed debt and satisfy the funding bank.
