Hotel Refinancing

by John King on May 5, 2013

Hotel Refinance - Multiple Options

SBA 7a program - The 7a is a good loan because it is available with a 25 year amortization.  It is not always the best option because it can be difficult to get a fixed rate and the SBA “Guaranty Fee” can be quite large on the bigger loans, but quite often it is the ONLY option available to hoteliers or motel owners - especially independently owned properties.

One saving grace for the program is that it only has a 3 year prepayment penalty and the penalty is only 1% in the 3rd year, so it can also serve as good temporary financing.

USDA B & I program - The USDA Business and Industry program is another option. It can also be a good solution since a 30 year amortization is available, but the program is only for properties on the outskirts of cities and in rural or semi-rural areas, although many properties on highway interstates will qualify.

It can also be tough to get anything other than a variable rate AND the USDA has what is called a “10% net tangible equity requirement” which can be hard to overcome depending on how long you have owned your property and how much you have depreciated it.

SBA 504 Permanent Refinance program - This is a section of the 504 underwriting guidelines that has gone largely unnoticed for the past few years and it is now a permanent part of the 504 program. It has real value for the right borrower as it allows existing hotel owners to refinance their current properties while purchasing another property or while expanding their existing property.

The key is that you can only refinance an amount equal to half of what you are spending on a new property or an expansion of an existing property. One caveat:  if financing a new property, it will need to be cross-collateralized with the existing property.

It is also worth noting that the guidelines allow you to pledge equity in an existing property in lieu of a down payment on another, so this program could be a way to buy a new property without as much of a down payment.

SBA 504 Temporary Refinance program - Many hoteliers missed out on the temporary 504 refinance program that expired in September of 2012, and this program is not currently available, but it may come back in 2013. If it does, it will help a lot of hoteliers get good long term (mostly) fixed rate financing.

You can get more info about the program as it existed in 2012 here and stay tuned to this blog re: updates on the ” CREED Act,” which if passed will bring the program back.

Conventional Financing - Conventional hotel financing is actually available with very attractive terms, but you typically must meet the following conditions:

  • Higher end flag (Hilton, Marriot, etc.)
  • Large or “secondary” city location
  • Larger loan amount - typically $5 million or more
  • Consistently profitable for the last 3 years
  • Low loan to value - usually 65% or less

If you can meet all of the above terms you may qualify for excellent rates with terms of up to 10 years with 25 to 30 year amortizations.

Bridge Loans - Hotel Bridge Loans are now available to refinance and convert or renovate existing properties.  Terms will typically have an initial interest only period followed by principal and interest for a combined total of up to 3 years and with amortizations of up to 25 years.

Funds can be used for major renovations, PIPs, FF&E and equipment.

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