Be prepared if you want to land a hotel loan
Hotel loan landscape
- Hotel loans are harder to obtain than other general commercial loans.
- Some traditional banks will finance hotel-construction projects for developers with a solid track record.
- For startups and developments in rural areas, the Small Business Administration and U.S. Department of Agriculture may guarantee loans for renovation or construction.
- Developers have more financing options when they renovate or improve an existing hotel than they do with ground-up construction.
Hotel-construction loans are traditionally hard to get, but not impossible. A number of lenders, including large banks, offer hotel-construction loans.
In most cases, the developer of a hotel needs to have a solid track record, a rock-solid plan, bullet-proof numbers and the location has to be appealing. In recent years, too, developers have had to pony up a considerable down payment, up to 50 percent.
More recently, as credit conditions have loosened, some lenders have been willing to finance a greater percentage of the project.
Obstacles to hotel-construction loans
The pool of lenders who will do hotel loans is limited. Many lenders shy away from hotel assets generally, particularly during down times for the industry when room vacancies are running high. Even during good years like recently, hotels are generally viewed as a riskier asset class.
Many lenders also steer clear entirely of construction loans for all commercial properties. So, the pool of lenders willing to finance a ground-up construction project for a hotel thins out even further.
One reason is that failed hotels, unlike struggling industrial, retail or office buildings, can’t be easily converted for other purposes. For the lenders who will finance a ground-up construction, the underwriting requirements tend to be strict.
So, for developers of hotels, this all likely means that you will have to do more digging to find the right lender. And if you are going to a traditional lender for a hotel construction loan, you’ll also have to come prepared with a file of information that explains your background and past successes, and tells the story of your project.
Developers often have more financing options when they are renovating or improving an existing hotel than when building a hotel from the ground up. Small businesses and developments located in rural areas have some government-loan options available, however.
Options for borrowers
One of the financing options for development companies that meet the federal definition of a small business is to tap the Small Business Administration (SBA) 504 program. The proceeds of a 504 loan typically can be used for the acquisition of land and property, for improvements to an existing property and for ground-up construction.
The SBA doesn’t directly loan the money, but works with approved lenders and community development corporations (CDCs), which are nonprofits set up to encourage development in an area.
Lenders underwrite the loans according to guidelines and employment targets established by the SBA. The loans carry 20-year terms. A percentage of the loan will normally be financed by the CDC, and another portion the bank. SBA loans require a 10 percent down payment from the borrower.
The United States Department of Agriculture (USDA) also guarantees loans made by private lenders for hotel development. For example, in 2015, USDA guaranteed a $7.5 million loan to the Southern Hospitality Group to purchase a seven-story, 173-room hotel in downtown Alexandria, Louisiana. USDA also previously guaranteed a $3.9 million loan for a Sleep Inn hotel in Jonesboro, Louisiana.
USDA hotel loans are only available to developments in rural and suburban areas that have been deemed eligible, however.