No Hotel Loan for You!
Meeting the requirements to get a decent hotel loan from your
local lender can be difficult but not impossible. Let's face it,
what lender wants to put money up for a roach infested dump in
downtown Detroit? You'd have to get a separate loan just for the
insurance.
Most lenders will only finance hotel properties that are
"flagged". In other words, most banks, public and
private lenders will only provide hotel loans to individuals who
are starting a franchise under certain major hotel/motel chains
such as Best Western, Hilton, Super 8 and other well-established
hospitality brands; Sid's Sleep Shack need not apply. In
addition to being a virtual nation-wide brand, the particular
establishment in question needs to show a profitable operating
and occupancy history.
Even if you want to build a new hotel/motel from the ground up,
forget about starting your own brand; most lenders will only
provide hotel loans to build the same "flagged"
hospitality companies as they will for the purchase of an
existing property. Besides having a well-known flag, getting a
hotel loan for a new property is possible provided it is well
located and can be provided with strong management.
Lenders reserve the best hotel loan rates and terms for
properties that are well cared for, attractive, and have
pleasing amenities like pools, wireless internet, cable, and
complimentary continental breakfast buffets.
Hotel loan terms will, of coarse, vary from lender to lender,
but most banks and other investment capital institutions provide
5, 10, or 20 year loan terms for amounts up to $2,000,000. These
loans can carry an interest rate ranging from 7% to 8% and
typically carry a recourse clause, although some lenders are
more flexible than others in this regard.
Just a brief note on recourse loans; this type of loan hold your
personal assets liable in the event you default on the hotel
loan-seriously bad news if your franchise doesn't turn out to be
as successful as you originally thought. This is the lender's
way of protecting its assets by separating those who are serious
about the hotel business from those that just want to try
something new. If you're not familiar with the details of this
loan, you should either educate yourself thoroughly first or
look around for a non-recourse loan. The terms of a non-recourse
loan simply hold the hotel, or whatever else you spent the loan
funds on, liable in the event you default.
If you're planning on borrowing over $2,000,000 to build or buy
a larger hotel/motel, the interest rates may be a little better,
although not much. Interest rate lows can be more favorable by
up to a half percentage point, while to current ceiling is still
hovering around 8%. With a larger hotel loan comes a longer loan
term, usually 20 to 25 years. One boon of a larger loan is that
most institutions offer limited recourse in the event of a
default.
Meeting hotel loan requirements can be difficult, after all,
this is unlike any other kind of real estate loan and as such
has its own rules, terms, and procedures. If you think the
hospitality business may be for you, make sure you choose a
lender who will take the type to answer questions to your
satisfaction. With how the market is these days, there are
plenty of lenders out there competing for your business. Take
your time and choose carefully from the several loan products
they offer; if you're not satisfied, move on. The hotel business
can be both challenging and rewarding. Depending on your
location, service, and financing, it can be a great way to build
long-term wealth.