Loans for Hotel Construction
Real Estate can be a very profitable industry if done correctly. There are many different ways that it can be made profitable if you have access to the funds to invest. This article is about getting loans for hotel construction, also called Hotel Development Financing.
Building a Hotel is a no easy task. Neal Business Funding is here to be your key partner in this complex journey. We have the experience and know how to help you accomplish your goals.
The difficult part of a project like this would be to come up with that type of money required. Very few people actually have that much money on hand that they will be willing to invest easily. That is well understood through the world. There are options to make this happen other than just having a lot of money in the bank.
Hotels are a very popular type of real estate. You may think that there are only a few different big hotel names throughout the country, which is true. But there are also a lot of different ones that eventually get bought out by the bigger ones. Funding for hotel purchasing or construction can be timely and expensive, but this article will go over all of this in detail.
Here is a list of what will be covered in this article: loan qualifications, hotel construction financing, hotel development financing, bank loan for hotel business, non-recourse hotel construction loan, hotel lending, hotel financing, hotel financing options, SBA hotel loans, SBA 504, and SBA 7A.
Hotel Loan Financing Qualifications
- A lot of the lenders have some specific qualifications that you must meet in order to be considered. All lenders are different and may require some additional or less qualifications. Ask the different lenders what they require in order to be the borrower. These are just the normal qualifications:
- 3+ Years in Business
- No Recent Bankruptcies, Foreclosures, or Tax Liens
- Down Payment of At Least 10-20%
- DSCR (Debt Service Coverage Ratio) above 1.20
- 680+ Credit Score Preferred
Hotel Construction Financing
Building a hotel is a big investment which can quickly turn into a very complicated and complex project. Because this is such an extravagant adventure, acquiring a loan requires more documentation and preparation.
Know your competitors
Think about football for a second. Professional football players will watch film of their opponents. They will learn what they do frequently, who their best player is, what runs they play. Every team wants to be able to find another team’s weak spot. If that is located, then they know how to beat them. Compare this to the hotel business. If you know your competitor, if you know how much they charge each night, how much they pay their employees, what they do that’s different. Many other questions could be answered, but these are some of the big ones. Business is not all fun and games. You must know how to meet the market demand, which is also why you must need to know the market.
Know what is happening in the hospitality market
This could go unsaid, but it is so important to be involved in the market. No one ever knows when the market could tank or skyrocket. You will have a better understanding of it if you actually keep an eye on it. If you don’t continue to watch it, things could dramatically get a lot worse for you. The real estate market is such an analyzed and discussed topic, especially since 2008. You will easily be able to find information and data about almost every area in the world. Every state has a different real estate market, just always make sure that you are doing your research.
Create a plan for your Hotel Construction Project
Just like any type of job or position, there needs to be a plan created. Goals are created with plans. The end result is what we want, but how do we get there? Plans need to be created in order to reach that goal. The lender wants to be able to see this plan and have a better reason to give you the money. A great plan includes expectations, time frames, cash flow, and an end goal.
Be prepared
Being able to provide the correct documents, the best answers to any questions, and potential numbers are very important. Show the lender that you know your stuff. Prove to them that you deserve their loan. They want to make sure that they are going to get their money back. Make sure that they understand that they will.
Here is a list of some plans and documents that you might need:
● Where are you looking to build
● How big is it going to be
● Who are the sponsors or developers
● How much is it going to cost
● What is the profitability of it all if it works out
● What is your cash flow going to look like
● Are there any tax incentives
– Have you done any surveys
● Are you going to have swimming pools, dining area, elevators
● How big is the smallest/biggest room?
● What is the supply and demand? Can we meet this demand?
● Is this a seasonal hotel
Hotel Development Financing
The thought of building a hotel might seem very intriguing and attractive. There are some things that must be considered before going this route. At the end of the day, there are still loans for hotel construction. Lenders are there because they know how important and essential hotels are to a community. One must think of what other developing structures will be surrounded by the building. Airports often have hotels very close to them. People are often coming in and leaving very quickly in order to make the most of their time. Beaches often have hotels close to them. The demand is people don’t want to drive an hour to the beach everyday on their vacation. They want to be able to step right outside and already be there.
Non-Recourse Hotel Construction Loan
There a few main points that need to be made in order to understand this properly:
● This is considered a riskier investment. Therefore, higher interest rates are involved. It is higher risk because they do not collect any more after the collateral has been sold. If the property has depreciated, then the lender could be losing a decent amount of money.
● Most commonly used for high capital expenditures, longer loan periods, and revenue streams can be unknown.
● LTV (Loan-to-Value) are limited to 60%.
Loan to value is the maximum dollar amount that a lender will loan to you as a percentage to the property’s value. Here is an example to help explain this.
You want a home that is worth $200,000. You have $30,000 ready to be put down as a down payment. Your loan amount would be $170,000. That means your loan to value ratio is 85%. If you take the $170k divide it by $200k, you get 85%.
It might be easiest to know what a “recourse loan” is compared to a “non-recourse loan” to help understand this type of loan.
Recourse Loan
This type of debt gives the creditor the ability to seize the full amount of debt that is owed in the scenario of delinquency. They can liquidate the collateral (they can sell the land/building/or anything related to loan) and pay off the rest of the loan. If there is still a balance remaining, the lender will attempt to get the remaining balance. Kind of like a car. If you don’t make the monthly car note, the bank could potentially come take their car back. At the end of the day – it is their property.
Non-Recourse Hotel Financing
This debt is secured by a collateral. Meaning if there is a delinquency on the loan and the lender doesn’t want to do business anymore, they can take their building/land back. Once the lender has liquidated the collateral, they cannot continue to try and collect on the balance. It is considered “even” at that point.
Hotel Financing and Lending
Hotels are not cheap. It does not matter whether or not you are trying to build a new hotel or buy a hotel that is for sale. It can become a very expensive endeavor. Luckily the 1% are not the only people that can afford to acquire a hotel. They can be financed, just like most big ticket items.
Hotel Financing Options
There are different types of loans or financing options when looking to take a mortgage on a house, or even buy a car. Why wouldn’t there be a difference when financing a hotel? We
all have multiple loan options to choose from. There is no one size fits all. It must be tailored to your needs financially and mentally. The bigger types of loans that are offered for a loan for hotel go as follows: Bank loan for hotel business, SBA 504, and SBA 7A.
Bank Loan for Hotel Business
It never hurts to go and ask the bank that you are banking with and see if they have any options for you. Price obviously becomes a factor, but banks are able to help with loans. If you have a good record with them and a good plan set up to pay it off, they may be able to help you out even more than you would realize. This generally isn’t the most popular way, but don’t rule it out of the running. Banks can be the ones to fund an SBA loan, which is discussed below. You would just have to ask them if they offer SBA – guaranteed loans.
SBA Hotel Loans
SBA, Small Business Administration, loans are the most common type of loans when acquiring, building, or refinancing a hotel. This loan comes from multiple sources and not just from the Small Business Administration. The SBA sets terms and guidelines for what the loans should be. Lenders, developers, small lending institutions are the ones that actually provide the funding. SBA 504 and SBA 7A are the most used loan programs provided for the hotel industry. There are three important parts to understand about SBA loans. 1. The SBA lends indirectly by promising a big percentage of loan amounts through constitutions and banks that are participating. 2. Not everyone will qualify for an SBA loan 3. THE SBA does not lend directly to small businesses
How to Obtain an SBA Loan for a Hotel
First, why do you need the money? It is discussed above as well. Having a plan in place is important. It helps you when times get rough or you lose motivation. It helps the bank know that you know what you are planning on doing. It helps your partners know where the end goal is. The second step that always must be considered when looking at getting a loan is asking yourself, “How much money do I need?” This is a very crucial step. Many loans have a maximum loan amount that they are willing to lend. Making sure that the dollar amount you need matches up with the maximum loan amount is essential. Once you have made your plan and figured out what type of loan you desire – shop around. This can be a tedious portion, but it will pay off in the end. Finding the best lender can
be very important. A lower rate could be offered, but also the connection between the partners and the lender is important. After these steps, it will be time for you to apply. Most of them will be having an application online. If they don’t have one online, then it might be smart to give them a phone call and ask for all the required documents needed. Just so you won’t have to be running back and forth from your lender back to your home.
SBA 504 Hotel Loan
Small Business Administration 504 loans can combine two different loan programs. One of them is from a lender, and the other one is from a community development corporation (CDC). A CDC may also be known as a nonprofit lender. This is used mainly for buying land and buildings on the land, building or improving a facility, and even refinancing debt. It unfortunately cannot be used for any type of rental properties. Here are the details below:
Maximum Loan Amount Up to $14,000,000
Minimum Down Payment 10 – 20%
Interest Rate Around 4%
Loan Terms 20 years
Credit Score 680 +
SBA 7A Hotel Loan
Small Business Administration 7(a) loans are the most common type of SBA loans. They really are available for any business to refinance or purchase commercial properties that are already owned up to $5,000,000. These smaller businesses that could use such financing are medical practices, dental practices, CPA firms, architects, funeral homes, and most importantly – hospitality. This type of loan can also be used for working capital, an SBA 504 loan cannot be used for such. Here are the details below:
Maximum Loan Amount Up to $5,000,000
Minimum Down Payment 10 – 15% + of the Purchase Price
Interest Rate 5 – 9%
Closing Cost 2 – 5%
Loan Terms 10 – 25 years
Credit Score 680 +
Years in business 3 +
DBSC (Debt-Service Coverage Ratio) 1.20
Funding Time Frame 2 – 3 months
SBA Guarantee Fee Up to 3.75% (guaranteed portion)
It may be worth it to find the best way to find such funding of a larger project as Hotel Construction. The difficult part would be to come up with that type of money. Very few people actually have that much money on hand that they will be willing to invest easily. That is well understood through the world. There are options to make this happen other than just having a lot of money in the bank.
Hotels are a very popular type of real estate. You may think that there are only a few different big hotel names throughout the country, which is true. But there are also a lot of different ones that eventually get bought out by the bigger ones. Funding for hotel purchasing or construction can be timely and expensive, but this article will go over all of this in detail.
Here is a list of what was covered in this article, loan qualifications, hotel construction financing, hotel development financing, bank loan for hotel business, non-recourse hotel construction loan, hotel lending, hotel financing, hotel financing options, SBA hotel loans, SBA 504, and SBA 7A.
Loans for Hotel Construction
As you can see above, there are a lot of different options for you to pursue your dreams of obtaining a hotel. It would be wise to always include a financial advisor and/or a tax advisor for these decisions. With all of these different types of loans and financing options, there is no correct answer. There are this many options because they are being utilized on a frequent basis. No contractor or buyer is going to be looking for the exact same thing. All projects are going to be different. Even if the dollar amount is the same, time frames could vary drastically.
