For almost thirty years, Commercial Lending USA has been providing services to clients in the fields of business finance and commercial real estate sales. Our expertise in financing major commercial real estate loans spans decades, and one of our specialties is undoubtedly hotel finance!
We are equipped to handle hotel acquisition and sales brokerage services from start to finish, in addition to hotel financing.
For unparalleled, personalized, and highly prompt service with exceptional outcomes, contact Commercial Lending USA when you require a hotel loan or any other hotel and/or hospitality transaction services. In this comprehensive overview, we address:
- How to Get Loans for Hotels
- Options and requirements for financing
- Practical Measures
- Top Sources for Hotel Lending
- Building, Conversion, and Remodeling
- How to Purchase a Hotel
- Refinancing Choices
- Hotels Types
- Schemes for Classification of Hotels
- Comparing Properties with and Without Flags
- Hotel Chains
- How commercial lending in the USA provides assistance
- Web-Based Materials
How to Get Financing for a Hotel
Commercial Lending USA arranges hotel loans for development, refinancing, reconstruction, and acquisition. The answer to the question, “How much does it cost to build a hotel?” may determine how much funding you require.”
Obtaining construction loans and financing for hotels can frequently be more difficult than for other kinds of real estate. This is particularly true if you are designing a project for an upscale, boutique, or non-branded hotel (also known as a non-flagged hotel). This may also apply if you’re trying to find a hotel construction loan to pay for renovations, additions, and conversions.
The hotel lender’s underwriting and a borrower’s calculation of NOI frequently diverge, leading to underwriting modifications by the latter that are based on factors including occupancy levels, franchise marketing, management, and furniture, fixtures, and equipment (FF&E).
Finding permanent hotel financing with terms longer than ten years requires proving to lenders that the collateral won’t be downgraded or unflagged at the end of the loan term for all but the most recently built hotel properties.
The Benefits of Commercial Lending in the USA
Commercial Lending USA leverages its extensive experience and knowledge of hotel financing projects to connect your hotel and hospitality project to one of our well-funded private or institutional hotel capital sources when securing hotel financing or hotel construction loans for our clients. This individualized solution ensures the project is funded in the most financially advantageous manner while saving our clients time and money. It is combined with our in-depth understanding of capital markets, operator transactions, regulations, and processes.
Hotel finance is a complicated subject that calls for knowledge and experience. For all of your large-scale hotel finance needs, Commercial Lending USA is the one company you need. They have both in abundance. We can negotiate the best price for you to get the hotel financing you require! Experience firsthand how our many years of combined expertise in commercial finance and sales services may assist you in reaching your hotel financing objectives. For a free consultation, give us a call at (206) 622-3000, or just fill out the form below for a quick response!
Options for Hotel Financing
Lenders create hotel loans as a single facility for financing hospitality that combines business and real estate loans. The physical property, or hotel building, is offered as security for the hotel loan.
Consequently, the loan application process needs to be approved in the same manner as a conventional commercial real estate loan. Additionally, it is necessary to demonstrate that the hospitality industry is a sound and viable financial venture.
Financing for hotels can come in several kinds. Depending on the course of action you wish to take:
- Refinance your existing hotel debt.
- Remodel a hotel structure.
- Purchase a fully-built hotel.
- Construct a new lodging facility.
This last option, of course, necessitates a hotel construction loan.
Finance Requirements for Hotels
Hospitality lending underwriters evaluate prospective hotel loans using a variety of metrics before approving them. Numerous hotel lenders have their own set of underwriting standards for determining the feasibility of a project.
Revenue per available room (RevPAR), which is determined by multiplying the hotel’s average occupancy by its average daily rate, is the most commonly used metric. This is particularly important if you are funding renovations with a hotel loan or refinancing.
Analyzing similar hotels in your area is something that capital sources frequently request. Here’s another area where Commercial Lending USA can be of assistance: We provide our clients with actual, palpable value by bringing our market knowledge and skills to the hotel finance process.
Studies of Hotel Feasibility
To validate your estimates and proformas, it is crucial to create thorough feasibility studies for hotel projects. Put another way, you have to “prove” your agreement with the funding source.
These studies must specifically show how your new hotel will affect local supply and demand. It’s also critical to realize that the application process for hotel construction loans differs from that of other hotel financing options.
Aspects of Finance
You can determine how much debt you can take on and how much equity is needed to seal the deal if you are aware of the financial aspects of a hotel property. Some borrowers only seek out the lowest down payment and the most leverage.
Sadly, they discover that the property is unable to sustain the debt service of a facility with such high leverage. When making a loan offer, a reputable lender considers the project’s actual or anticipated financial metrics along with the hotel’s construction financing.
Vital Signs for Hotel Lenders
- The hotel’s occupancy rate multiplied by the daily average room rate results in the RevPAR index, or revenue per available room. A hotel’s RevPAR Index, or its RevPAR relative to its competitors, indicates that it has stabilized or is ready for long-term financing when it hits 90% or above.
- The hotel’s revenue less its operational costs is known as net operating income, or NOI. The NOI expense ratio is the amount after operational expenses are subtracted. A lender may consider the estimated annual NOI for a three-year period at a 100% RevPAR index when financing a hotel bridge loan.
- Cap Rate: The unleveraged value of the hotel is calculated by dividing its net operating income (NOI) by the average value of similar properties, or the comps. Lenders can then calculate the size of the hotel loan by dividing the hotel’s value by the loan-to-value ratio. The hotel is worth more at a lower cap rate. On the other hand, a hotel with a higher cap rate is considered less valuable.
- Debt Yield: To calculate the debt yield on a hotel loan, lenders divide the net operating income (NOI) by the loan amount. All other factors being equal, a greater needed debt yield corresponds to a smaller (lesser) hotel loan amount.
- Net cash flow (NCF) can be defined as the hotel’s net operating income (NOI) less depreciation, management fees, and reserves for one-time capital expenses (FF&E, for example).
- Loan-to-value (LTV) Ratio: Hotels are typically able to secure financing with LTV ratios of at least 70%. Loans guaranteed by the SBA may have LTV percentages as high as 90%.
- The total amount of capital invested in the hotel project is known as the total cost basis. The cost basis and current value might occasionally diverge, which can have an impact on acquisition and refinancing deals.
- Prepayment Penalties and Mitigation: Prepayment penalties take the form of defeasance or yield maintenance. There are various ways that borrowers might lessen prepayment penalties:
- Loan Assumption Option: This option enables the borrower to sell the hotel even though it is currently in debt by having the buyer, the new owner, assume the existing debt at the time of the sale.
- Extra Debt: After the closure, some lenders permit further borrowing, frequently in the form of mezzanine financing. By doing this, a hotel buyer can reduce the seller’s discount to market value by taking on senior debt and adding extra debt at closing.
- Extended Open Period: Non-recourse hotel loans typically feature a ninety-day grace period at the conclusion of the term during which the prepayment penalty is waived. To help the borrower save money, the lender might price in a longer period of time.
Sources of Hotel Lending
Starting at $20 million, banks are one of our main sources of funding for the hospitality industry. When it comes to loans for hotel construction financing, hotel acquisition, refinancing, or renovation, we deal with a wide range of local, regional, and national institutions. Banks usually provide up to a 70% loan-to-value ratio for hotels.
Naturally, borrowers with strong credit scores and a solid development background will have the simplest access to bank loans. However, applicants with less than ideal credit histories can still get hotel financing with Asset Commercial Lending USA.
Banks may offer bridge loans or construction loans for the purpose of financing hotel building. Typically, both have interest-only durations ranging from 18 months to 5 years. Additionally, banks provide revolving company lines of credit that are helpful for both FF&E expenses and rehabilitation projects.
SBA Credit
The Small Business Administration offers a few schemes to guarantee hotel financing loans.
- SBA 7a Loan Program: Under this program, hotel finance loans up to $7.5 million with maturities up to 25 years and an LTC ratio up to 85% are guaranteed.
- SBA 504 Program: This option helps hoteliers buy commercial real estate and equipment with loans up to $15 million. It also offers terms up to 25 years and an LTC ratio of up to 85%.
- SBA Energy Efficient 504 Program: With a 90% LTC ratio and durations ranging from 10 to 25 years, this program can finance green hotel projects up to $20 million and beyond. It is only available for projects that use renewable energy sources or energy reduction.
USDA Financing for Rural Hotels
The Business and Industry Guaranteed Loan Program of the United States Department of Agriculture provides financing for lodging in rural areas. There are hotel loans up to $12 million with durations up to 30 years and LTC ratios up to 90%.
Additional Resources for Hotel Funding
- Franchise Exclusive Lending Programs: To provide hotel financing to franchisees, franchisors can finance it themselves or collaborate with lenders. Typically, there are requirements, like the need for a comfort letter and compliance with Property Improvement Plan (PIP) guidelines. PIPs mandate that a franchisee invest a specific sum of money over time to uphold the brand’s standards, which include energy efficiency renovations and FF&E. Franchisors may offer hotel financing for PIPs, but there are also other funding options, such as mezzanine loans, the SBA, and banks.
- Private Lenders: A range of commercial lenders, insurance providers, pension funds, and real estate investment firms are examples of non-bank private sources of hotel funding. In cases where debtors fail to meet bank underwriting requirements, private lenders play a significant role in providing hotel finance.
- Conduit loans for CMBS: These loans provide favorable conditions for sizable loans secured by luxury real estate. For these non-recourse, fixed-rate loans with periods up to ten years and a thirty-year amortization, the LTV ratio is usually 75 percent.
Finance for Hotel Construction
- The most complicated type of hotel finance is, of course, the development of a new hotel project. Getting the best financing for building a hotel is like financing a new venture. The primary resemblance is the absence of any track record of proven performance.
- A hotel construction loan and a hotel refinancing differ primarily in that the former involves the building of collateral.
- Loans for hotel buildings demand a substantial amount of money. Large-scale down payments and a potentially protracted building phase should be factored into your hotel financing strategy.
- The financing must also survive for the length of time needed to obtain an occupancy certificate, open the hotel, and start generating income. As a result, the loan amount needs to be sufficient to cover both the hotel’s operational expenditures and debt payments.
- Bridge loans and bank finance for hotel construction are offered through Commercial Lending USA. For instance, the USDA and the SBA provide bank funding guarantees for hotel construction and FF&E costs. As an alternative, hotel operators can plan to finance FF&E via leasing.
Renovation and conversion of hotels
Financing for hotel renovations covers upgrades that lengthen the establishment’s lifespan and boost its worth. Renovations can be self-funded if operating cash flows are divided up into reserve accounts for the purpose of renovation.
But the majority of hotels, if not all of them, would rather finance their own building and improvements. Franchisees are required by PIP commitments to maintain hotels in accordance with brand standards, which may necessitate a substantial amount of financing for renovations.
Finance Options for Renovations
CMBS
For hotel building and restoration projects, commercial mortgage bridge loans are also utilized. These loans are often offered as interest-only loans with a maximum term of three years, a maximum loan-to-cost ratio of 85%, and a recourse or non-recourse lender loan fee of 1% to 2%.
Mezzanine Debt
A mezzanine loan of subordinated debt is an additional source of funding for renovations. In the capital stack, this debt is positioned above equity and below senior debt. Mezzanine loans, of course, are more expensive to reflect the increased risk and additional leverage. Even though it can be difficult to obtain mezzanine financing, we are able to do so for your hotel finance needs.
A hotel that changes to a different flag or turns a non-flagged property into a flagged property is known as a hotel conversion.
The parent company typically finances managed hotel conversions, while the franchisor typically finances franchise conversions. But occasionally, a hotel conversion might need outside funding, like when a hotel with a flag becomes one without one.
Finance for the Purchase of a Hotel
For the following reasons, a hotel might be an excellent acquisition target:
- Poor management is the cause of underperformance.
- Neglected upkeep or renovations
- Recent shifts in the population
Furthermore, if a high-performing hotel brand’s long-term strategy aligns with theirs, there are also excellent possibilities for acquisition. But these hotels frequently come at a high cost. Commercial Lending USA usually uses both SBA-guaranteed loans and traditional banks to finance hotel acquisitions.
Refinancing of Hotels
There are various situations in which hotels can be refinanced. Once a newly built property stabilizes at 90% to 100% of the RevPAR index, you can usually refinance it. Lenders also look at these metrics:
- Levels of occupancy
- Rates per day
- Benchmarks against expenses
- Deferred maintenance with limited scope
- Sufficient reserve levels
- Increased cash flow.
Refinancing commercial bridge loans and hotel construction loans occasionally requires the use of a mini-perm loan and a takeout loan. As an alternative, we can cash out equity or renegotiate an existing mortgage for better terms.
To learn more about how Commercial Lending USA can simplify the difficult process of obtaining hotel finance, watch this video:
Hotels Types
Although some offer long-term leases or the sale of a portion of their inventory as condominium apartments, hotels are places that provide short-term lodging. Hotel buildings come in a variety of sizes, from simple structures with a few rooms to intricate complexes with several buildings and large properties.
The size, price, and quality of hotel rooms differ substantially. While some only have a mattress and running water, the majority include a range of facilities, from very basic to extremely luxurious. A good-quality bed, air conditioning and heating, a dresser and other furnishings, a toilet, and a television are amenities found in most mediocre or better hotels. Kitchen amenities like a refrigerator, microwave, coffee maker, and sink are common in hotel rooms.
Expensive luxury hotels have well-furnished, roomy rooms along with extras such as a business center, fitness centers, conference spaces, tennis courts, golf courses, bars, restaurants, childcare, in-room massages, and room service.
On the other end of the scale, roadside motels charge less than $30 per night for basic lodging, while some of the best hotels have rooms that cost four figures per day. On the other hand, some motels charge an hourly fee for situations in which visitors only need to use a room briefly.
Some hotels, referred to as “flophouses,” provide cheap lodging for both short-term and long-term visitors with basic amenities such as small rooms, communal restrooms, and little to no housekeeping.
Schemes for Classification of Hotels
For hotels that have been highlighted, Smith Travel Research (STR) provides a classification system based on the average daily rate:
- Finance
- In-between
- High Midscale
- Luxurious
- Higher End
- Luxurious
Multi-flag chains typically provide a variety of hotels across multiple STR ratings. Marriott provides the following structure, for instance:
- Luxurious: JW Marriott, Ritz-Carlton
- Upper Class: Delta, Marriott
- Upscale: AC Hotels, Residence Inn, Courtyard by Marriott, Springhill Suites
- Upper Midscale: TownePlace Suites by Marriott, Fairfield Inn
A hotel can be described in a variety of ways based on its ownership, target market, features, and cost.
Hotels with Flagged vs. Non-Flagged
Brand-name hotels are those that are flagged. Franchisees or the parent hospitality company that runs the “managed” hotels are directly owners of them. Brands including Marriot, Hilton, Hyatt, Four Seasons, Radisson, Choice, and Red Roof Inn dominate the flagged hotel sector.
Hotel corporations frequently carry multiple designated brands, each of which represents a distinct compromise between price and facilities. For instance, Choice Hotels possesses real estate under each of the following names:
- Cozy Inn
- Cozy Suites
- High-quality Inn
- SLEEP INN
- Clarion
- Hotel & Suites Cambria
- Standard Suites
- Suburban Extended Stay
- Econo Lodge
- The Rodeway Inn
- The Ascend Hotel Collection
These brands cater to a variety of industries, including corporate travel, extended stays, and affordable travel. The parent company frequently provides funding for construction and restoration projects involving flagged hotels. The franchisor typically offers franchisee-financing programs for hotel franchises, but they may also impose operational and financial obligations on the franchisee.
Hotels with flags
Hotels that are flagged, particularly those that have several brands, have to be careful not to oversaturate a market and start eating into one another. To the detriment of the parent firm, a Sleep Inn situated in close proximity to an Econo-Lodge could potentially pilfer consumers from its corporate cousin.
Companies aim to reduce the likelihood of cannibalization by not placing similar properties close together. Alternatively, they can aim to saturate a market by grouping together hotels that cater to various price points and market segments. Typically, franchise agreements outline the maximum level of market saturation that is allowed.
Hotels Without Flags
A hotel that is not labeled is run and owned independently. It can operate in any market niche and anywhere, but since it is not a franchise, it needs outside funding.
Families own a large number of non-flagged hotels. They might be located in places with limited rivals, or they might compete directly with hotels that have been flagged. Because they lack the brand awareness that recognized hotels have, non-tagged hotels frequently compete on pricing.
Franchises for hotels
Franchise agreements require particular thought. For instance, when a franchisor and lender collaborate to finance a hotel for a franchisee, the lender typically requests a “comfort letter” that outlines the lender’s entitlement to run the hotel in the event that the franchisee defaults on the loan.
The lender may choose to sell the property, but they may also choose to keep the intangible but valuable flag name alive and run the defaulted property (often through a hotel management company). Typically, comfort letters are the same for every hotel brand.
See our post, Buy a Hotel Franchise: Ultimate Guide, for additional details on acquiring a franchise hotel.
Managed Hotels vs. Franchised Hotels
When every hotel satisfies specific requirements set forth by the brand, then the hotels are flagged. These brand requirements make sure that every hotel offers visitors the same, consistent degree of delight. Maintaining standards for costs, accommodations, and services is beneficial for all parties involved, regardless of whether the brand is controlled or franchised.
Brand mandate compliance is frequently assessed through brand standard audits. Hotels that consistently receive subpar marks from brand standard audits risk fines up to and including the termination of the franchise agreement, brand removal, and potential litigation damages. Managed hotels that don’t pass an audit might have their management team replaced.
A Word About Reimaging
Re-imaging is the process of making changes to a hotel to make it more appealing to a new group of people. The procedure could be as easy as adopting new logos or as difficult as rebuilding the physical facilities that are already in place.
Reimaging is frequently utilized to elevate a hotel’s image or establish a certain standard of excellence. Reimagining a hotel that has been flagged necessitates a brand overhaul in marketing. Re-imaging can involve improving quality and increasing amenities for independent, non-flagged hotels. For example, a two-star hotel may reinvent itself as a three- or even four-star establishment.
- Different kinds of hotels
- Resort Accommodations
With features for entertainment that draw visitors, these resorts are destinations in and of themselves. Resort hotels may offer a variety of services, ranging from gourmet dining and day spas to casino rooms, water parks, golf courses, vacation resorts, and amusement parks.
The hotel owner either owns the resort attractions or has revenue-sharing arrangements with them. There are a lot of resort hotels near each other on the Las Vegas Strip. Another type of resort hotel is the Disney Hotel at Walt Disney World. Resort hotels can be found all over the world in popular tourist locations.
Opulent hotels
Luxury hotels offer premium amenities, but they also charge premium rates. On-site dining options, full-service lodging, and excellent, individualized service are probably available.
Luxury hotels frequently use the designations “Five Stars” or “Five Diamonds” to denote their exceptionally high and exclusive standards. Among the well-known names in luxury hotels are Four Seasons, Ritz-Carlton, and InterContinental.
Lifestyle and boutique hotels
While there are some flagged boutique hotels as well, these are usually privately held, non-flagged establishments with high-end amenities. Although they might range from intimate to fully furnished, most facilities can accommodate less than 100 people at once.
A wide range of travelers with similar hobbies are drawn to lifestyle hotels, including vegetarians, bird watchers, and athletes.
Complete Service Hotels
Full-service hotels provide a wide range of amenities and guest services. These consist of a fitness facility, meeting rooms, on-site eating, and business services. While complete services can also be found at mid-scale hotels, many are luxury establishments. Hilton and Marriott are two excellent examples.
Select or Focused Service Hotels
These are modest to medium-sized lodging establishments with a restricted range of amenities targeted at particular types of tourists, including lone business travelers. Some amenities, including on-site dining options or swimming pools, that are typical of full-service hotels could not be present in these establishments. Courtyard by Marriott and Hilton Garden Inn are two well-known examples.
Budget and Limited Service Accommodations
Generally speaking, economy hotels are smaller and emphasize inexpensive rates. They provide simple lodging, limited services, and minimal on-site facilities. Some places offer free meals and vending machines. Days Inn and Holiday Inn Express are well-known examples.
Hotels with Extended Stays
Small-to-medium-sized hotels with exclusive weekly or monthly prices that are more affordable than day rates can be found here. These rooms often contain kitchenettes, and there may be a washing room on the premises.
It’s a straightforward strategy designed to appeal to budget-conscious travelers who want lodging for a week or more. Two branded chains in this category are Extended Stay Commercial Lending USA and Residence Inn by Marriott.
Clubs for timeshares and destinations
These hotels are vacation ownership establishments where individual units are rented out to visitors for a set number of days each year. Aside from ownership structures, timeshares and full-service hotels are comparable. Destination clubs are more akin to resorts and are frequently located in residential areas.
Motel
A motor hotel, often known as a motel, accommodates visitors arriving by car, bus, or other means of transportation. Usually, it’s an inexpensive hotel with rooms that front an outside parking lot directly. Typically, motels are small establishments near major thoroughfares.
Sometimes managed hotel businesses will purchase motels and rebrand them under their own names, possibly changing the name from motel to lodge or inn.
Small-scale lodging
When you need to reserve a stay of fewer than twenty-four hours, you use a microstay hotel. Clients determine the length of their stay and the time of check-in. Couples searching for brief, private lodging frequently use microstays.
They come particularly handy for taking the entire family to an occasion, such as a baseball game. Microstay hotels are able to charge more per room since they can sell the same room several times a day.
Boutique Hotels
Dozens of specialty hotels exist. This is a brief list that is arranged alphabetically:
- Hotels in bunkers
- Cave lodgings
- Hotels on the cliff
- Hotels in capsule form
- Hotels with day rooms
- Hotels with gardens
- Snow, ice, and igloo lodging
- Adore lodging
- Hotels recommended
- Hotels on trains
- Hotels made of straw
- Hotels in transit
- Hotels in treehouses
- Hotels are submerged in water.
Hotel credit offered by Commercial Lending USA
Hotel building loans and hotel financing can be difficult and complicated tasks without expert assistance. For its clients, Commercial Lending USA is a potent ally. We make use of our more than 34 years of commercial financing expertise.
We begin by comprehending the intricacies and particulars of your hotel project by applying our extensive experience and understanding of the market. We match your project’s financials to the best hotel finance capital sources, keeping those specifics in mind.
A Remark Regarding Our Hotel Lenders
Raising money is crucial for hotel construction loans and repair projects. Tier-1 banks frequently exhibit prudence and have a preference for loan-to-value ratios and low-risk projects.
On the other hand, the number of lenders offering hotel construction loans and other hotel finance solutions has skyrocketed in recent years. Private lenders, investment banks, mortgage bankers, and lower-tier commercial banks are some examples of these lenders.
These hotel funding sources anticipate greater growth, even though they will take on more risk. Still, if the borrower has done their homework, they usually decline fewer applications. Underestimating the entire cost of capital is one common mistake. Possible lenders frequently reject loan requests as a result of this arithmetic error.
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