Hotels can be tough to finance so the focus of this blog is on hotels involving real estate. Hotel loans that do not include real estate will not be covered. Hospitality loans are a beast upon themselves. Each lender has different ideas on what is lendable and what isn’t based on the lending structure of their brand.
Flagged or Not Flagged
Every hospitality loan starts with one question. Is it a flagged hotel or a unflagged hotel? This means, is it part of a national franchise like Hilton or Marriot hotels (flagged) or is it a mom and pop motel in the desert (unflagged). Flagged hotels have the benefit of carrying a brand which means certain standards will be kept regarding business processes. It also validates these proven processes as a recipe for success. For unflagged hotels, because they are all based on the experience of the management and no history, valuation will usually be lower than for flagged properties.
Interior vs Exterior Corridor
Interior corridor hotels are hotels where you access your room from within the hotel, while exterior corridor hotels are hotels where you access your room from the outside. Exterior Corridor hotels/motels tend to have lower valuations because they often have lower quality furnishings. They are also more worn out due to exposure to weather.
Management is Key
There are many moving parts whether you are a flagged or unflagged hotel, one being management. Who is running the operations and what level of experience and success that person has had in the past matters to a lender because it establishes a forecast to future success under that management.
What is it Worth?
Just like purchasing any real estate, do not be surprised when you, your broker, the appraiser, the lender, and any other person involved in the purchase have different ideas on the valuation of the building. Everyone has their own tinted lenses for whatever will benefit them the most. It is important to stay calm and to not take it personally.
Management is important once you are in control but experience matters most in helping you purchase the property. Search for a lender who specializes in hospitality loans. Once you find the right person, find out if they focus on flagged or unflagged properties and their years of experience doing these loans. Has your broker had success with this loan type? Find out how many he has done. Is your real estate lawyer familiar with hospitality loans? These are important positions that could cost you thousands down the road if you don’t have an established team. Take the time to put together a good team.
If you are looking for a ground up construction, it will be very difficult unless you have both a lot of experience in this venture, having past success, or you are a very qualified borrower. If none of the aforementioned are in your corner, hard money and bridge loan lenders should be your focus. Magilla Loans is an aggregator for all loan types including hospitality loans and might be a good place to start in finding the right lender.