The hotel market is growing in 2018. Supply and occupancy are both expected to rise this year, and the long-awaited peak in the market cycle is still in the future. The hotel construction market has “normalized,” according to analysts. That means lenders may want to be more cautious, but there is still plenty of opportunity for growth, especially in California. As this new normal emerges, the Small Business Administration (SBA) 504 loan is more helpful than ever for hotel owners looking to expand.
Wine Country Hotels Are Looking Good
Travel will increase this year, thanks to increased employment and consumer spending. An estimated 79% of millennials will travel on their vacations, which is a slight rise over last year. Generation X will travel more this year as well (67% of its members will travel on vacation). Business travel is up, too, especially among small businesses, according a 2018 Hospitality North American Investment Forecast. Many business travelers (42% of millennials) will combine personal travel to their business trips.
This increase will be spread unevenly around the country, and to California’s advantage. Southern California will lead the state’s hotel market in 2018, according to the forecast, but Northern California’s wine country will draw new visitors as the area rebounds from last year’s wildfires and continues to develop. An uptick in bar and restaurant renovations throughout the industry is attributed in the report to the increasing influence of millennials on the market.
Sacramento is another strong market. It saw a 3.6% increase in occupancy in 2017, simultaneously with a record-breaking busy year for Sacramento International Airport. Statewide, occupancy is expected to rise 2% this year.
Hotel Financing Requires “Maturity”
Coauthor of the 2018 hotel forecast Peter Nichols characterizes lenders’ approach to hotel financing as “mature” in a recent interview. They will be looking closely at local supply and demand, the borrower’s historical performance and indicators of future success, he said.
Presentation counts for a lot when applying for hotel financing. A thorough feasibility study, market study, financial projections and other quantitative information will be an advantage for a loan applicant. Creating an impression of experience and capability, as conveying the “vision” for the project clearly and convincingly, will also increase an applicant’s appeal for a lender.
The expectation of experience and general competence is not a matter of principle. In an environment of rising interest rates and construction costs, organizational ability has a monetary value. Timing the various processes that make up a project—architectural planning, permitting, financing, etc.—to fit together smoothly saves time and money.
The 504 loan simplifies hotel finance planning in two ways. Its approval process takes approximately as much time as a bank loan, so the major components of a project’s financing should fall into place on time, if not before. This timeliness will allow the project to move ahead without concern over future funding complications. Second, the 504 loan is the permanent financing of a construction project. Since that is in place at the beginning of the project, the transition from construction financing to permanent financing should be fast and seamless.
The 504 loan’s flexibility is also a benefit for hoteliers. It can be used to:
- purchase commercial land or buildings
- construct or upgrade buildings
- finance large equipment
- refinance real estate commercial mortgages
Thus the 504 loan can be used make renovations or replace major systems as well as expanding a hotel or building an additional facility.
The 504 loan has three components. It is administered by a Certified Development Company (CDC) such as TMC Financing, and loans are granted in conjunction with a conventional lender (bank or credit union) that provides 50% of the total project cost. The borrower’s CDC facilitates the SBA loan for up to 35%, or $5 million ($5.5 million if the project qualifies for the Green Energy Program), at a fixed, below-market rate. The borrower provides 15% of the project cost as a down payment.
Because rates are currently rising, the 504 loan’s fixed rate is an especially big advantage to hoteliers. Locking in the interest rate now can create significant savings. The 504 loan has terms of 10, 20 or 25 years, and it is fully amortized (so there are no balloon payments).
Conventional lenders also find the program advantageous because they are in first position in a 504 loan and so their exposure and risk are limited. This increases the applicant’s attractiveness for the conventional lender, giving you a competitive edge over the other hoteliers taking advantage of the booming market.
Finally, hotels often provide ample opportunities for participation in the SBA’s Green Energy Program. Besides creating a permanent savings on utility costs, participation in the Green Energy Program allows the borrower to securing a larger loan ($5.5 million) and to exceed traditional funding limits and finance additional projects in the future, up to $16.5 million. To qualify for the program, the borrower can:
- buy or construct a building that consumes 10% less energy than their current location
- buy the building they now lease and make upgrades to consume 10% less energy
- buy or construct a building that produces 10% of the energy it consumes or produces fuel to reduce fossil fuel consumption, using equipment financed through the loan
TMC Financing is the national leader in hotel financing using the 504 loan. You can find out more about financing your hotel project from one our 504 loan experts. TMC is an SBA Premier Certified Lender, and has funded projects worth more than $9 billion across California and Nevada. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.