Aug 27, 2018

Fundamentals of Loans for Hotel Construction

Building a hotel from the ground is one of the most complex projects to get financed, that is because you do not have any performance history to backup your request. Finding financial aid for these type of projects is similar to getting financed when you’re starting any brand new business from scratch, with the added benefit that you will be building your collateral.

Brand new hotels have definitely higher costs and expenses than any other hotel projects. Throughout the process, you’ll likely pay out an important amount of money before you can open the hotel for business. It is worth mentioning that it could take a while before your hotel starts generating enough revenue to make large loan payments while fulfilling its operating cost.

When acquiring a hotel loan for a new construction project, there are several factors that should be taken into consideration, since you will have to borrow enough to cover the following expenses:

  • Construction Down Payments
  • First Operating Months Expenses (1 – 4 months)
  • Loan Payments (6 – 9 months)

You should only consider taking out a hotel construction loan if you have the capital on hand to handle some or all of these up-front operating costs.

Best Commercial Real Estate Loans

Commercial real estate hotel loans could be thought as a real estate loan and a business loan put together. Since the subjacent real estate is being pledged as collateral, your hotel facility has to be approved like a traditional commercial real estate loan. Regardless, you are obliged to prove the validity of your hotel as a business.

Hotel financing is required for a wide variety of business situations. You may want to make renovations, acquire a new hotel to build a franchise, refinance your current hotel loan, or you can simply want to buy new equipment for your facility. Regardless of your situation, hotels usually acquire loans from the following sources:

Hotel Renovation Loan Options

SBA loans can be used for large hotel renovations, regardless, they are less used than other financing forms. SBA loans require more documentation to back up and prove how these renovations will positively affect the revenue or cash flow of the business.

Typically, renovations are less pricey than new projects, meaning your financing will be for a smaller amount. And this can make it difficult for some banks to put up with the SBA loan process since the amount of money is smaller, they are likely to make less money from it, depending on your project.

Best hotel renovation loan options

Conventional Bank Loan: If you already have a relationship with a bank, this could be the cheapest option for you

Business Line of Credit:  LOC (Business Line of Credit) helps you plan for unexpected expenses, while also preparing for smaller renovations.

Bridge Loans: Bridge loans will help you out until you find a better long-term solution.

Franchise Loan Options

If you are thinking about buying an already successful franchise hotel, you will find it easier to get a loan that others would, mainly because you have proven brand and business model, as well as connections that your franchisor may have. Franchisors role is critical in helping you get the financial aid you need.

The main benefit of being a franchise is that you will have a established well-known brand already. This will influence lenders to get their head around providing you a loan. You can seek recommendations on lenders they’ve worked with in successful deals in the past, meaning those lenders will be experienced or at least familiar with your business model.

Hotel Franchise Acquisition Loan Options:

All of the loans discussed in this article are great options for a franchise, with the addition of being able to borrow from franchise exclusive lending programs

Conventional Bank Loan: Especially great if you or your franchisor had already worked with a bank, or if either of you has a long-term relationship with said bank.

SBA 7a Loan for Commercial Real Estate: SBA Loans become easier to acquire when you have the right flag for your geographic location.

SBA 504 Loan: If your project does not surpass $20M, then these loans are a great fit for you.

New Construction Loan Options

Only hospitality lenders that offer $1M+ will be able to help with new construction projects. The vast majority of them, such as SBA Loan, will be difficult to qualify for. Your best option to get financed for a new hotel is going to be though private commercial real estate lenders.

Traditional Bank Loan: Traditionally, banks have financed a large number of new construction hotel project proven to have long-term proof of concepts.

Private Lender: Private hospitality construction loans lenders, or real estate financing companies typically look for projects with a high ROI potential.

Real Estate Investment Company: These are the best option for difficult or high-cost projects.

Refinancing Loan Options

Refinancing your hotel loan tends to happen when you’ve been forced to borrow less than the desirable loan to build or buy a hotel. Some of the benefits that come along with a refinancing hotel loan are that it can provide lower rates, provides extra capital towards hotel operation and cheaper monthly payments.

If your business operates successfully, refinancing a hotel loan would be much easier since you would be offered more options because your business now has a history of making large mortgage payments. Additionally, if you’re refinancing a loan, then you’ve most likely been paying on your loan for some time already. This means you won’t be needing as much financial help than you did before when you first got a loan, which will open up your borrowing opportunities.

Conventional Bank Loan: Likely your best option if you’re a strong borrower with an existing banking relationship.

SBA 7a Loan for Commercial Real Estate: Most common $1M to $5M long term loans for motel and hotel projects.

504 SBA Loans: These are the best option for difficult or high-cost projects.

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