Hotel Financing: The US hotel business had another record year in 2018, with absolute values that were the highest ever recorded. CBRE Hotels Americas Research predicts a tenth straight year of growth in 2019.
Borrowers looking to buy or refinance hotel properties are discovering that some lenders are wary of hotel agreements today. As many believe, the industry is at its peak.
There are still some nice discounts out there. As experienced lenders, we believe that the best and most cost-effective way to finance your hotel is with an SBA 504 loan. In this post, we’ll go over today’s peak hotel market as well as recent modifications that affect SBA 504 loans.
A booming hotel financing
The demand for hotel rooms has continued its nine-year ascent in tandem with the continued strength of the US economy. With hotel occupancy rising 0.5 percent year on year to 66.2 percent in 2018, the industry’s sixth consecutive record high. The average daily rate (ADR) climbed 2.4 percent to $129.83. Revenue per available room (RevPAR) gained 2.9 percent to $85.96. According to STR, group and business travel will continue to drive demand growth for hotel rooms in the United States. Additionally, weekday demand is also high, indicating that corporate and business visitors are flying more frequently.
CBRE even anticipates that over the next three years. Hotel returns will be the greatest of any commercial real estate industry. In the words of CBRE’s R. Mark Woodworth, “The magnitude of profit growth may not be spectacular. But the probability for revenue growth is solid, and operating margins remain well above historical levels.” Undoubtedly, growth will be slower. According to STR & Tourism Economics, demand is expected to rise by 1.9 percent per year. Down from previous expectations of 2%.
What does this entail for those seeking a hotel financing?
Hotels have emerged as one of the commercial real estate industries in which owners may still generate profits. Bank finance for commercial real estate is no longer as readily available as it once was. And owners may have difficulty securing cheap financing. Timing might be the difference between winning and losing for owners looking to lock in a low long-term interest rate on an asset. We feel that borrowing from an experienced hotel financing lender that specializes in SBA 504 loans is the tried-and-true approach. If you know where to go, you may locate capital to meet your short- and long-term funding needs.
SBA 504: Loans and Hotels
Hotel operators will discover that the SBA 504 loan provides advantages that no other loan can match. Borrowers of facilities older than two years can take advantage of all the various incentives that come with the SBA 504 program. 85 percent LTV (loan-to-value ratio) financing. A low fixed rate, and durations of up to 25 years. The SBA guarantees a portion of the loan, taking on the risk of default and allowing for a significantly greater LTV than a traditional commercial property mortgage alone. SBA 504 loans can only be used to purchase existing hotels, buy and refurbish a hotel, or refinance a current loan.
The SBA designates some properties as “special purpose” properties. A 15% down payment is required for 504 loans, and the definition of a special purpose property is described as “a property that is appropriate for one or limited use: a building that cannot be changed to another use without a significant financial expenditure.”
Furthermore, borrowers cannot use the SBA 504 program to refinance an existing SBA or other government loan.
Close-up of an SBA 504 Loan
Let us clarify the nature of an SBA 504 loan. Assume a borrower is seeking SBA 504 financing to purchase a Best Western hotel for $4.2 million, including the PIP. Where do the funds come from? How much money must the borrower come up with out of pocket for the down payment?
The financing structure of an SBA 504 loan can be calculated as follows: 50% + 35% + 15% = 100%. This formula comes down to the following:
• 50 percent: The initial 50 percent is in the form of a traditional loan from a financial institution. Such as a bank or specialized SBA lender. A first-lien loan is often a fixed-rate loan repaid over 25 to 30 years. In our case, this means that the first-lien lender will contribute $2.1 million to the overall financing of the transaction.
• 15%: The borrower pays the last 15% as a down payment. Most conventional loans require a minimum down payment of 25%; therefore. An SBA 504 loan results in considerable cost savings for the applicant. For our hypothetical borrower, the down payment will be $630,000.
• When a borrower acquires a branded hotel. The franchisor often wants a property improvement plan (PIP) that will bring the hotel financing up to date with the brand’s newest requirements, from design to energy efficiency. The SBA 504 loan will fund up to 85% of the acquisition cost, plus PIP.
Recent revisions to SBA 504 regulations
In recent years, the SBA has increased its examination of borrowers’ eligibility for the 504 program. While the SBA previously overlooked borrowers with minority equity partners (less than 20%). It is now paying particular attention to them and the sort of hotel ownership they possess. Previously, minority owners had too much SBA debt to qualify. They might possess a 5% ownership stake, while the majority owners were supposed to manage the firm. Today, they are no longer immune to SBA scrutiny—each borrower on a contract must have no more than $5 million in total outstanding SBA debt. A skilled SBA 504 lender with hotel expertise will understand this requirement and assist. You should arrange your transaction to avoid future issues with your partner borrowers.
Borrowers must submit a feasibility assessment to show that market circumstances support the hotel’s possible future success. Which is a relatively new SBA requirement. A certified third party’s report on a feasibility study looks into the neighborhood market and the local population. And other factors that may have an impact on the hotel’s success, such as an already overcrowded market.
After examining an SBA 504 loan package, an expert SBA lender will ask the appropriate questions. Foresee concerns and assist the borrower in overcoming any potential barriers. This is why it’s critical to choose the correct lender. Commercial Lending USA professionals have a vast network of contacts in the financial business. We specialize in effectively guiding both the borrower and the CDC through the loan procedure. Ensuring the success of their SBA 504 loans.
Smart funding.
The hospitality business may be at its peak, as some forecast. But Commercial Lending USA believes there are still good assets to be discovered. And when a borrower finds one, we are here to help them clinch the transaction at a low, fixed rate.
