Hoteliers who want to finance hotel construction or expansion may be hesitant to take action because of talk of rising interest rates and uncertainty about how to start. It is true that they will find their task somewhat more challenging in 2018 than it was in 2017. Financial institutions funded a significant industry growth spurt in 2017 (an 8.8% increase in hotel construction by room year-over-year as of August) and now they have begun to react to analysts’ predictions of modest industry growth in 2018.
Those factors will not necessarily have a lot of impact on individual businesses, however, since local conditions may differ strongly from national averages. If you are interested in hotel construction or expansion, you should seek out the financing you need. You will find a variety of options you might pursue—some better than others. It will help to have some basic preparation before beginning the search for the financing that is right for you.
What Hotel Loan Interest Rates to Expect
You can’t be prepared if you don’t know what to expect. Discussions of loan conditions are unavoidably very general, since those conditions might depend on variables such as your credit score and financial history. General numbers can be cited though. One finance-related website provides a lengthy list of commercial real estate loan types with their approximate interest rates and LTV. LTV (loan-to-value) is the portion of the total cost of a project that the loan will cover.
Here are the main types of loans that are of interest to hotel operators and their interest rates in 2017:
How To Approach A Lender
There are a number of other variables to consider when applying for a loan. Interest rates may be fixed or variable, meaning that the rates could rise. Amortization and the presence of balloon payments is a concern for most borrowers as well. SBA loans are fully amortized, meaning there will be no balloon payment. Aim for lenders in line with your budget and your needs.
Armed with that knowledge, you can begin choosing lenders to approach. Borrowers should have their financial information at hand and they have to be ready to present their project with the same conviction that inspired them. “Create the right story” for the lender, an insightful article on this topic urges.
Make sure you approach lenders with a healthy amount of wariness. If an offer seems too good to be true, that could very well be the case. “Ask what other properties they have closed recently, who they maintain relationships with, ask them to walk you through a term sheet, and be transparent with you about the deal and the conversations they are having,” Mac Dobson, Senior Vice President of Aries/Conlon Capital advised.
Hotel Financing With a SBA 504 Loan
You can see in the table above that the Small Business Administration (SBA) 504 loan has a high LTV ratio and low interest in relation to the loans being compared. When you receive a 504 loan, you are able to lock in a fixed rate much lower than most conventional loans. The 504 loan is administered by Certified Development Companies (CDC) like TMC Financing, which are nonprofit organizations set up specifically for that purpose.
Choosing a 504 loan is a great option for hotel owners looking for reasonable, fixed rates, a low down payment, and a streamlined application process. The loan comes in three parts:
- The first is a loan from a conventional lender for at least 50% of the total amount. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage.
- Your CDC facilitates a separate SBA loan of 35% of the total, up to $5 million, at a fixed, below-market rate for a term of 10 or 20 years. You can receive up to $5.5 million for projects eligible for the SBA’s Green Energy Program. This will be your second mortgage.
- Then you, the borrower, contribute 15% to the loan as a down payment. This is the rate for facilities that are classified as single-purpose properties by the SBA. Otherwise, your down payment is 10%.
- 50% Conventional lender
- 35% CDC
- 15% Borrower
A 504 loan can be used to:
- purchase land or buildings
- construct buildings
- purchase equipment with a service life of ten years or more
- improve, upgrade or renovate buildings
- refinance conventional debt
Since hotels are high energy consumers, hotel construction projects can often incorporate energy-efficiency measures that make them eligible for the SBA Green Energy Program. To qualify for the program, a borrower must
- buy or construct a building that consumes 10% less energy than your current location
- buy the building you 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
Besides receiving a higher maximum SBA loan limit, a borrower that participates in the Green Energy Program can exceed the traditional number of projects that receive funding. The borrower will also save money by participating in the program, since the resulting energy savings reduces their utility bills. Not to mention, being environmentally friendly is a bonus and is a way to connect with environmentally conscious guests when choosing a hotel to stay at, especially in the California area.
The 504 loan is an accessible and reliable source of financing that should be considered carefully among the options available to hotel projects.
TMC Financing is the No. 1 504 hotel lender nationwide, operating in California and Nevada. If you have questions about receiving a 504 loan for your hotel project, a TMC 504 loan expert would be happy to talk to you and guide you through the 504 loan application process. Contact a TMC expert today.