Hotel Financing


Hotel Financing Is Available...If You Know Where To Look! 

Banks in general do NOT like doing hotel loans. Let me repeat. Banks in general do NOT like doing hotel loans. There are also many types of hotels: select-service, limited-service, full-service, convention, resort ane extended-stay hotels. An underwriter will view each of these types differently. Underwriting a hotel loan is different than underwriting a multifamily. With a multifamily unit, you simply look at the rent roll which will be reasonably consistent, view historical cash flow, collateral and the normal things associated with underwriting the risk. With a hotel or motel, occupancy changes daily and sometimes hotel fees can change daily.

Don't Hire A Heart Surgeon To Do Brain Surgery

In general lenders look at the following criteria in evaluating a risk:

Cash Flow

We could take each one of these criteria and discuss them, but we will focus in on some of the more important issues for those obtaining financing.

Collateral has become more of a hot spot for many lenders today. Most lenders will discount an appraisal 20-25% on the actual real estate value, 50% on the machinery and equipment and frequently up to 90-100% of the good will. Let's assume you're purchasing a convenience store with real estate for $1,000,000 and you are looking to put a $200,000 down payment towards the purchased. You may have an appraisal on the property indicating a $1,000,000 value, but the bank is looking at it as a $700,000 property on a liquidated basis and looking to YOU, the borrower, for additional collateral. (You can pick your jaw up now) Does this somehow seem unfair to you?

Let's say you took out a home equity line from your home as part of your $200,000 down payment. You're thinking "My lender will like this because it's my own hard earned money" WRONG. Even though you DID pay the principal on the house down, your friendly lender looks at it as another loan (which technically it is) so they have to factor paying back THAT loan also in the approval process.

The fact also remains that many borrowers will borrow the money from friends, relatives, former associates and "people that love them" to come up with their equity. Tsk tsk tsk. Your banker does not like that either, because if it isn't your "own" money into the deal, it's much easier to walk away from the business. (The two most common denominators of default and foreclosure the past few years has been insufficient equity into transactions and insufficient direct industry experience)

We really could go on and on about the challenges that people face in financing their locations. Suffice it to say that theye exist. What should you as a borrower look for and expect from the people looking to procure financing for you?

First of all, an absolute thorough understanding of hospitality and hotel financing is absolutely necessary.  If you needed heart surgery, would your first preference be a physician who is a general practitioner? If you needed a root canal, would you prefer someone who specializes in root canals and does them DAILY or someone who did all types of general dentistry? Don't you find it ironic that we might insist on a specialist for a root canal that costs $1,000, yet we'll deal with a generalist when it comes to financing our commercial property that might be in the millions of dollars?

Specialists will almost always outperform generalists in anything in life.

Second, deal with someone with offers multiple options for financing as well as the ability to do financing for unqiue situations. Loans can be declined by some lenders and accepted by others for simple reasons as:

And this is just about the FACILITY, much less the credit or experience of the borrower, how the property cash flows or other important factors.  The list is actually MUCH longer than this. You should INSIST that the company you deal with offer multiple types of financing such as SBA, conventional, short term and hard money.

Third, deal with people that can offer or find options for finding additional capital into the transaction.  Whether that is a seller held second, equity provided by joint ventures, mezzanine financing, among others, the large real estate moguls of the world look for creative financing, why shouldn't YOU?

Fourth, when looking for a company to do your financing, make sure that THEY deal with other companies that specialize in this industry also.  There are hospitality attorneys, insurance companies, accountants, contractors and vendors that deal exclusively or high degree of specialization in hospitality. You as the borrower should deal with companies that not only can provide the financing for you, but also provided value added products and services to make you more profitable.

Fifth, when looking for your loan, deal with people that know the difference between cost of money and return on investment and not just the cheapest rate and the lowest points on a deal.  Again, your calculator will NEVER lie to you. Frequently the cheapest rate or the lowest points is NOT the best deal.

Sixth, deal with companies that are active in the respective industry organizations so they are up to date with the latest trends, technologies, etc.

Our area that we focus in, although not limited to, is in the $1,000,000 - $5,000,000 and done with SBA 504 and SBA 7(a) loans and USDA B&I Rural Development loans where geographically eligible. We also do conventional (which can be made by banks, credit unions, insurance carriers, etc) but we are strongest with SBA loans since they tend to be more active in the arena.  We're also active in doing hotel construction loans. A small percentage of transactions we do are hotel hard money loans and private money financing.

So How Do You Apply For A Loan?

In order to pre-qualify hotel loans faster, we have found that providing a certain amount of information up front helps us expedite the underwriting of a loan. If a borrower can provide us with the following information, it would help us a great deal. You can click the underlined links and find the form on the website. 

Loan Questionnaire  (Or you can conveniently apply online HERE)
Personal Financial Statement
Copy Of Credit Report (Or Authorization)
Previous Years Financials (Returns / Profit Loss Statements)
Current Year-To-Date Financials

After we have pre-qualified a transaction, this is the document checklist that we go by usually when doing purchase financing, refinances, construction and investor owned purchased. All application forms are available here on the website.

Please click this link to view videos about properly submitting for pre-qualifying and for full underwriting.

Once you have begun the formal prequalification process, we will begin to provide free information to you to further assist you in not only your financing efforts, but more information about running your business profitably.

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How To Pre-Qualify For Hotel And Motel Financing

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