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
Don't Hire A Heart Surgeon To Do
In general lenders look at the following criteria in evaluating a risk:
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
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
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.
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
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.