Hotel Financing News
AAHOA 2018 update
By Ramin Mostaan
This year at AAHOA tradeshow I had more inquiries than the previous years. I also felt that it was the largest AAHOA tradeshow in terms of the number of the attending vendors and the hoteliers that I can personally remember. My report indicates that nearly nine out of ten inquiries were for a new construction loan and the remaining was either for a conventional refinance out of an SBA loan or for an acquisition of a new hotel. The SBA and the USDA world has not changed as much and we still are financing acquisitions, refinances, and construction through these programs and I did not have as much inquiry on these programs. CMBS loans got fairly conservative by the end of last year but slightly more aggressive now and again the inquiries were limited. I then discuss the two subjects mostly inquired at the show, the construction and the conventional loans.
In the past few years, the lenders have funded many hotel construction loans under the SBA/USDA and the conventional programs facing concentration on hotels in their portfolios. However, I believe that if a project has strong sponsorship and the requested terms are reasonable, we will find funding for it. Most inquiries at the show were on the following topics:
- Liquidity: This is the most important credit requirement for a construction loan. There needs to be sufficient cash not just for the initial equity injection or the land purchase but to make certain that once the hotel opens, there are sufficient funds for the first year in case of delayed stabilization. Some lenders request the borrowers to open an interest bearning CD account with a balance determined by the lender released after eighteen or twenty four months when the tax return indicates required level of debt coverage ratio.
- Global cashflow: Although liquidity is important but can be diverted to other uses and projects while global cashflow is generally a sustained source of liquidity. A major question is whether a borrower is able to cover the debt service in the first few months or until the hotel is profitable from the global cashflow.
- Experience: It is generally assumed that a member of the borrowing team has prior experience in development and construction projects.
- Best time to start financing: Starting the process too early is a waste of time and the resources with financials getting dated and requiring frequent updates. The best time for Scientific Capital to get engaged is when the architect has started working on the plans and is about a month or so from completing the plans. Assuming that the city approval takes an average of 2 to 3 months, this should give us about four months which is ample time for the financing process.
- Feasibility study: It is extremely helpful to have a feasibility study completed prior to the start of the financing as a very substantial and reliable document in qualifying a construction project. It is also important to engage a national hotel company with more extensive database resulting in a more reliable report.
- SBA or conventional: Depending on the region and the market, we may find conventional loans with high Loan to Cost of 75% to 80% otherwise in many markets we need to get help from the SBA/USDA program to reach this high level of Loan to Cost. If the Loan to Cost is lower, we should be focused on the conventional program.
- Confusion on SBA/USDA: It is important to keep in mind that the SBA/USDA are permanent loan programs. In case of a construction loan, the lender gets approval from the SBA/USDA for the permanent take out loan. The construction loan is a standard bank loan but is taken out by an SBA/USDA loan.
With the rates hikes expected to continue and the PRIME index now at 4.75% probably reaching 5% or 5.25% by the end of this year, many hoteliers with an SBA loan having adjustable rate are seeking to refinance to a conventional loan. The following refers to some of the topics brought up during the inquiries at the show on conventional loans:
- LTV: Anywhere from 65% to 80% depending on the market. In some states or regions we can easily go to 80% on conventional loans while in some other markets the average LTV is about 65% with exceptions of 70% to 75% on much higher quality transactions.
- Rates: With the rate hikes, I don’t think in general we see rates below 4.75% fixed for five years. Although PRIME rate is rising, fixed bank rates are still reasonable for the five year fixed. In many cases, the loans are full term but reset every five years. Sometimes we get a ceiling placed on the resets so the hike at reset is not unreasonable. On some projects with higher risk factors we have to work with more aggressive lenders with higher rates.
- Amortization: 20 to 25.
- Renovations funds, PIPs, and cashout: We can increase the loan to include renovations and PIP. In some instances where the LTV is not high, we can do cashout as well. In a current project we are cashing out 1.3 million on a simple conventional bank loan.
- Point: Generally one point unless we can negotiate a lower amount.
- Foreign ownership: With more reasonable LTV, we have been able to finance foreign acquisitions or refinance foreign ownerships.