HOTEL LOANS

It is well publicized that the current economic downturn has removed $200 billion a year from the commercial real estate markets. But 88% of the industry think tank seems to agree that we are at the very end of the current cycle. Thirty four percent believe that we are in the first inning of a new cycle. For the industry, the recession is expected to end by the end of 2008 and things should get better from here. There is no doubt that capital is harder to come by. However, if you can find the capital, this is a great time to be developing, because you should be opening into some great markets in 2010 and 2011. So get yourself some strong partners, do your homework, and be prepared to bring more equity than in the past.

Hotel loans come under the same underwriting guidelines as other commercial properties. There is usually service income that is part of the net operation. The lender will categorize the hotel based on product type, amenities, and location. After analyzing the financial statements of the hotel, the true profitability will become clear. This will allow the underwriting company to compare similar entities to determine the proper pricing structure. Underwriting for flag hotels gets a better rate than a non-flagged hotel. This is known as aggressive underwriting. Aggressive underwriting translates into lower rates, fees, and longer terms.

There is an examination of all the various departments of the hotel. The profitability of each department is calculated by taking the revenue of that department and applying all allowable expenses including the cost of goods or services sold.

Other items to be considered are market, location, property condition and the characteristics of the property. The property should be accessible and visible from the highway. Business hotels will provide ready access to downtime business areas and airports. There will be sufficient parking to accommodate range of services and location. Vacation hotels will be highly visible from interstates and be close to tourist attractions.
A stable history of operation is critical. There should be at least three years of operation that can be examined in order to secure a hotel loan. The minimum occupancy rate for the past three years should be at least 60%. Flagged properties are preferable with franchise agreements extending beyond the term of the proposed hotel loan.

Hotel loan rates are set specific to each loan and are usually determined by various factors. Some of these factors are: hotel management experience, cash flow coverage, equity injection, and location of prospective hotel, personal credit score total finance for the hotel and whether it is a SBA or non-SBA loan.

Hotel loan interest rates are tied to a variety of indexes. They are the prime rate, 30-day commercial paper, 30 or 90 day LIBOR, 5,7, or 10 year Treasury Swap Rates, and a 5 or 10 year US Treasury Note. Fixed rates are indexed to US Treasury, Treasury Swap Rates, or FHLB-Seattle for 2, 5, 10, 20, or up to 25 years.

There are conventional hotel loans that offer up to 65% of appraisal value. Closing costs for a conventional loan are much less than under an SBA Loan.