Hospitality Loans: An Inside Look at the Market and Financing Sources

ATLANTA—The big question on everyone's minds is when? Of course, this refers to the interest rate increase. Most acknowledge that the Fed rate hike won't be very impactful, and in fact, most wish it would have happened already. The capital stack tightened down in the recession, with CMBS in particular down to around 9% of the market in terms of lending. It went back out to about 40% in 2014 and is accounting for around 36% of the market this year. CMBS lending is at about $80 billion now, anticipated to reach $100 billion by the end of the year.

There's a lot of involvement from commercial banks, certainly CMBS, and life insurance companies are at around 18% of the market. It's a naturalized market share division between these groups, which has helped to support market values, and the market is more normalized overall at this point. Another trend of note is the emergence of crowdfunding. It represents a big piece of the equity component, both for new construction and repositioning.

Other parts of the lender equation are local demand drivers, such as a strong, varied economy and larger surrounding support businesses for long-term sustainability. In addition, lenders are always looking at exit strategies on transactions, with some venturing in to secondary and tertiary markets.

With the lending environment showing normal signs of activity and owners looking to make improvements, it may be the right time to begin sourcing financing options. Borrowers today are typically able to get more competitive financing deals due to the increased competition among lenders. Local, community banks and hospitality lenders each have roles in the hotel financing space and finding the right partner is key.

Hotel owners often look to local community banks for financing, especially if there is already a pre-established personal or business relationship, because community banks offer business banking services, as well as lending services. Borrowers can typically best use these services for new hotel construction or longer-term financing projects. However, when considering a loan with a community bank, it is important to remember that these institutions may be restricted to a certain local community and would not service projects outside the geographic market areas served by the institution.

Another restriction to keep in mind is often only a certain percentage of community banks' loan portfolios can be invested in the hotel industry in an effort to evenly distribute risk across all types of industries. Additionally, community banks are heavily regulated, which can make for a lengthier underwriting process, at times up to 60 days to fund a loan. An existing business relationship with a local bank may not be the right fit for a short-term bridge loan.

Hotel franchisees are very often looking for short-term capital, such as a CapEx loan, to support a renovation, brand refresh or brand conversion, acquisition, refinance, discounted purchase option or note purchase, property improvement plan, or a furniture, fixture and equipment (FF&E) carve-out for a new construction project. These loans typically range from $200,000 to $10 million and are amortized during the useful life of the improvements, typically three to 10 years.

With careful structuring the loan to meet a franchisee's specific needs and the requirements of a senior mortgage through several loan and capital lease options, CapEx financing can provide up to 20% of the total project costs for a new construction project. This allows the developer to more easily secure construction financing as this lowers the overall risk to a potential construction lender.

Lenders such as Access Point Financial can close short-term loans in as little as two weeks, allowing a buyer to quickly acquire, renovate and stabilize the property until permanent financing can be sourced. Whether buying properties or refinancing current debt, a hotel owner would want to move expeditiously, enabling a quick close on the transaction to have the capital necessary to complete the renovation or brand conversion.

New construction loans are currently available for franchised hotels in the $5-million to $40-million range with credit enhancements from the franchisor and/or municipality. These loans are generally shorter term loans, three- to five-year terms with the first two years being interest only. After the term expires, owners typically refinance and obtain traditional financing at a lower rate and a 25-year amortization.

"For these common financing needs, it is most appropriate to look to a specialty hotel lender," says Dilip Petigara, COO with Access Point Financial. "A lender focused exclusively on the hotel industry knows the nuances associated with hotel properties and hotel projects. A hospitality lender is also open to offering short-term loans for hotel acquisitions, or to refinance an investment. Specialty lenders are not as heavily regulated as traditional banks therefore, they can close a loan much more quickly than a community bank. In some cases, this means the necessary funds for a CapEx loan project could be acquired in as little as two days and a bridge loan funded in about two weeks."

Petigara goes on to explain: "With market activity in the hotel industry trending up, it is important to know what type of lender can supply a loan that meets the necessities of a project and a specified timeframe. Most lenders serve a niche and offer a specific product whether it's a CMBS loan, SBA loan, new construction loan, CapEx or bridge loan. With many choices, hotel owners must be able to evaluate the pros and cons of borrowing from a community bank versus a specialty hotel lender and which one will offer the most appropriate loan product. This decision will not only fund a current project but will also support overall profit objectives."

Access Point Financial (APF) is a specialty hotel finance company offering a full-service hospitality lending and advisory platform. It provides financing to qualified franchisees of major hotel brands and independent boutique hotels throughout the United States and Canada. APF provides tailored loan and capital lease programs to meet the specific needs of each client.

Market data provided by Marcus & Millichap

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Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.