Hotel Financing News
We had an active 2018 market with very high transaction volume and according to our client inquiries so far this year we expect this trend to continue. The high volume of transactions last year means many hotel loans were funded turning lenders’ balance sheets heavy on the hotel assets or in many cases at the limit. Here is the status of various loan programs as related to hotels:
Many conventional lenders including banks have filled up their hotel conventional loan bucket but we are able to place loans for the QUALIFIED projects, albeit with less diversity in the range of offerings. The lenders have raised the rates by a point to point and half in the past year where if a lender was charging 4.5% back then, it is probably charging 5.5% to 6% today. Depending on the market and the level of demand, rates of a five year fixed loan are generally starting from 5.75%. Although the conventional lenders have recently become very selective on the hotels and have been channeling the challenging projects through the SBA program, here is an example of a project that was funded with a conventional loan in spite of the market saturation and the project challenges supporting our strategy that we should examine the project and the market and try hard to use the conventional program instead of simply rushing to the SBA program:
|Purchase of Holiday Inn Express and Clarion of Fredericksburg, VA|
In spite of the drop of the default rate of the hotel CMBS loans to under 1.5% in Feb of 2019, the CMBS lenders have noticed the peaking hotel values and the increasing supplies of new rooms and have become far more selective on hotels. Any challenges such as negative TripAdvisor reviews, revenue or STAR report moderate fluctuations, brand tier, and building characteristics that would have been overcome before may be a deal breaker now. A major drawback to this program is that the lenders processing these loans have to find a buyer (also called B-piece buyer) for their loans as they do not hold the loans on their books and cannot close the loans unless a buyer has approved the loan. Unfortunately the buyers are not privy to the loan until the loan is fully underwritten and all the third party reports and the legal/title work are completed at which point the lender puts the loans online for the buyers to review/analyze and to select/buy (securitize). This means that a significant time and money is spent before a final decision is made on whether a loan will finally close. With the drop of the 10 year SWAP index to under 3%, the fixed 10 year rate depending on the project characteristics should be generally ranging from 4.75% to 5.25% albeit lenders may impose a floor on the rate.
USDA program should be used if the financing needs to leverage a government program and the borrower’s SBA allocation is already exhausted. This program has limited funding per state that gets allocated to each state as part of the annual US Government funding. The regional office processing these loans will score the project and funds are allocated to the projects with the highest scores. If the state funds are exhausted, a request is filed for the national funds where there is even higher level of competition for hotels to get funding. Unfortunately hotels score low on the scale and are harder to fund through this program specially if the hotel is located in an area with lower unemployment rate and higher median household income. As the project size goes up, the chances of getting funding decreases. This is one project we funded through the USDA where the state fund had been depleted and we were lucky to get allocation through the national funds:
|Purchase finance of the Grand Plaza Hotel of Branson, MO|
SBA 504 and 7(a)
Both programs are going strong in spite of a new SOP (regulation book) that was issued in February which added more confusion to an already confusing program.
The rate of the 504 loan (2nd position loan by the SBA) has gone down to 4.58% this month but the amortization is now 25 years (used to be 20). A previous change to the program worth noticing is that the maximum Green 504 allocation (total of all 2nd position SBA debenture loans) is now16.5 million for all affiliates in aggregate as opposed to having been unlimited in the past.
We have had many recent inquiries for 85% loan to value under the 7(a) program and it is important to note that the SBA rule simply states that the loan amount should be determined with the following formula:
Maximum loan amount EQUAL or LESS than (85% of the appraised Real Estate value + 10% of FF&E appraised value )
If the loan exceeds the value determined through the above formula, additional borrower collateral may be required. The rates of the SBA loans for hotels are generally variable and calculated as PRIME (currently 5.5%) + SPREAD. The average SPREAD for the hotels are observed to range from 1.25% to 2% where more challenging projects may have spreads higher than 2%. Very few lenders have started offering five and even 10 year fixed rates. This program is most suitable when the purchase involves income projections. Samples of these
projection projects are:
|Purchase finance of Gladstone Inn of Jamestown, ND|
|Purchase finance of Quality inn of Bossier City, LA|
Probably the toughest type of hotel loan to finance in this market is a construction loan. With many lenders having reached their limits on hotels, the hotel valuation at its peak, and many newly built hotels saturating the market, it is tougher to justify the need of yet another new hotel and to qualify for these loans. The best approach is to have a very reputable outfit to prepare a feasibility study justifying the demand. With a positive feasibility QUALIFIED borrowers should be able to fund the project. The most important qualification factors are:
- Liquidity: Many borrowers inquire about a construction loan but do not have sufficient liquidity for the project. Borrowers are required to have excess liquidity on top of the down payment demonstrating the ability to pay the loan payments in the first year while the hotel is stabilizing
- Outside Income: It is important to have outside sources of income to support the operation while the hotel stabilizes and to meet unforeseen expenses
- Experience: Although having development background is desired, having existing hotels to prove the ability to successfully operate hotels is a must.