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Hotel Financing News

January 2016

Note that we will be in Nashville AAHOA trade show on 30th and 31st of March, visit us at our booth!

Economic Expectations for 2016


As we all predicted and expected, the upward revenue trend for the majority of hotels in most markets continued in 2015. The exception has been the oil and fracking regions who will probably not see relief in 2016. The job markets are thriving indicating that both the consumers and the businesses are doing well and will continue to travel and to book hotel rooms. Stock market has shown signs of volatility mostly due to the plunge of the oil prices to under $29 a barrel and the Chinese slowing economy. However, when the stock market goes up couple of thousand points year after year, a sensible expectation is a reasonable correction.

As opposed to the pre-2008 economy which was built on a house of cards with everyone expecting a crash of the housing and the lending market, today’s economy has grown cautiously, gradually, and on more solid grounds with no bubble to burst on the horizon. Consumers having learned their lesson back in 2009, have avoided maxing the credit cards and actually are having savings. Lending is more sensible as well with regulators watching more closely; nearly 6 years later, still getting a residential loan is not too easy and our clients all know how cautious the commercial lenders are when underwriting hotel loans. Gas prices are at record low expecting to remain low for the rest of the year specially now that Iran is entering the market and is increasing its oil production. Although the drop of the gas prices is to the detriment of the fracking industry and the hotels in those regions, it will boost travel and the hotel industry as a whole. Fortunately, the construction activity is strong and absorbs part of the layoffs in the oil and the fracking industry which lost over 60% of the active rigs in 2015. Hotel construction projects have mushroomed in the past two years and the hoteliers are in a gold rush to acquire new sites for their development projects.

Fed finally raised the rates for the first time in over a decade in December and many hoteliers with adjustable rates will notice the increased minimum payment on their next statement but not only the hike was expected, the revenues are high enough that the slight increase will not affect the bottom line. The Fed was inclined to raise the rates two or three times in 2016 starting with the first one in March. However, with the volatility in the stock market and the Chinese slowdown, the Fed will probably re-examine the economic landscape for the next rate hike and hopefully will not raise the rates more than once this year.

Financing availability for the hospitality assets will remain strong in 2016. The only concern this year is that many local conventional lenders have reached their maximum level of portfolio concentration on hotels. Scientific Capital compensates for that by sourcing funds from the regional or national lenders, hence continuing to provide uninterrupted financing for our clients for the rest of this year.

Expected Status of Major Hotel Loan Programs


CMBS Conduit (non-recourse)

Sometime in 2015, the CMBS Wall Street buyers started making more conservative underwriting decisions when buying hotel notes. Some hotel loans that could have easily been financed through the CMBS program earlier in 2015 appeared to be challenging later in the year. However, the program is still going strong, it is probably the major platform to use when financing hotels of 10MM plus. Currently the 10 year SWAP on which these loans are based is 1.93%. The 10-year fixed rate range from 3.75% to 4.25% depending on the hotel. With CMBS loans capped at 70% Loan to Value, Mezzanine loans which are the 2nd position loans behind the CMBS loans are available for hotels at the rates around 12% to 13% to boost the LTV to 80% or more.  Read more on these loans…



We are still not seeing an open secondary market for conventional hotel loans similar to the pre-2009 period when commercial and community banks were easily selling their loans which is why the conventional loans are not benefiting from the same availability as the SBA loans. However, local banks have been fairly receptive in financing hotels in their region and the majority of them probably hold the loan on their books. The problem is that markets are spotty where in some markets it is still hard to obtain a hotel loan from the local banks who are mostly interested in straight forward transactions. Scientific Capital alleviates this issue by sourcing funds from the regional or the national lenders. The expected 2,3, or 5 year fixed rates for these loans are anywhere from 4.5% to 5.5% depending on the market, the sponsorship, and the hotel. The loan to value remains lower in most markets and up to 70%. In few markets we have seen up to 80 or 85% Loan to Value (of the real estate)

SBA 7a
These loans continue to be the most popular program for the economy/mid-tiers and the loans of up to 5 million. The average spired over the PRIME index hovers around 1.75% to 2.25% translating to a variable rates of 5% to 5.5%. Our stronger projects benefits from lower spreads but we generally do not see spreads higher than 2.5%. We have done few project with fixed rates but they are still not widely available for hotels. The new SBA rules cap the loan to value to 85% of the real estate portion of the hotel’s value determined by the appraisal.

SBA 504
The program is going through a major overhaul.To start,  the SBA just announced that starting in a few months, the program may be used to refinance.Additionally, some of the franchise requirements on affiliates are going to be dropped (This refers to SBA forms that needed to be obtained from the franchisor of any affiliate hotels in which the borrowers had a perceived control- Clients who have obtained a 504 loan who also have other hotel partnerships recall the difficulties they had with their partners in those affiliates getting this requirement passed their partners). The rate on the first position loan of a 504 is varies depending on the market and is generally fixed for five at the rates of 4.75% to 5.5%. The second position loan by the SBA is now at 4.83% fixed for 20 years. The program, specially the 504 Green has been used extensively for by those who have used up their allocation to finance multiple acquisitions and in the near future multiple refinances.

In our call to a city in Carolinas, the zoning department informed us that they were working on over 20 new hotel projects. I believe that this trend is going to continue mostly due to the fact that our clients are acquiring new sites for development and the lenders are not holding back on financing hoteliers with the three required factors, experience, global positive cash flow, and liquid assets. The financing will get tighter as lenders concentration on hotel projects increase but will not be a major hinder as SBA 504 lending will continue to provide funding at high LTV for the hotel developments. The 504 Green is specially favored when borrower has used up his SBA allocations and need to finance more hotels construction projects at 85% for larger projects of 20+ million. Conventional loans are also available but at lower Loan to Value. Generally, the rate for the construction phase is about 5% to 5.5% and is followed by rates that will be set when the permanent loan funds.


USDA loans are suitable if SBA program cannot be used. With the 504 refinance option available now, many previously USDA qualified loans will be processed through the 504 program. The USDA rates are very similar to the 7a loans unless they are fixed in which case they are either fixed for five years or they are structured to reset every five years for the term of the loan. The amortization can be extended to 30 years as well for improved cash flow.





for further questions and discussions, please reach Ramin Mostaan at (949) 477 5000 or




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