Hospitality Commercial Lending USA (CLU) is a hotel mortgage broker with headquarters in California that specializes in private lending and mortgages for buyers of real estate around the country, particularly the lodging sector. A fair number of hotel and motel owners have benefited from our assistance in swiftly obtaining short-term bridge loans to fund their establishments until they are sold or refinanced into institutional credit. Many private lenders, some of which own multiple hotel properties and manage private lending departments, have long-standing commercial agreements with Commercial Lending USA. These lenders have proven to be very reliable sources of funding for our owner-operators of hotels and motels.
In order to help owner-operators and investors in the hotel industry make educated decisions about short-term bridge loans for their properties, this article will go over a lot of information. I’ll talk about the following subjects:
- What is a hard-money loan for hospitality?
- Why do operators of hotels and motels employ hard-money loans?
- Instances of closed hard-money loans for hotels and motels
- Standard terms and prices for hard money
- Refinancing hard money into an institutional loan is the exit method.
What is a Hard Money Loan for Hospitality?
A hotel, motel, bed & breakfast, holiday resort, or RV park is the security for a short-term (12–36 month) hard money loan in the hospitality industry. Individual or non-institutional private mortgage lenders as well as debt funds that focus on short-term lending offer hard money loans, also referred to as private money loans. The loans have higher pricing and closing expenses because they don’t demand as much financial evidence as bank or institutional loans.
What Makes Hard Money Loans Used by Hotel and Motel Owners?
Owners use hard-money loans for a variety of reasons. The most frequent situations that Commercial Lending USA has run into are listed below.
Quick Closing
Loans made using hospitality hard money can close in as little as one day. Most, though, require more time to conduct their research. An investor can get an advantage when a fantastic property comes up for sale by submitting an offer with evidence of finances and receiving approval for a hard money loan with a 7–14 day closing.
Hospitality Financing at the last minute when bank loans fail
Bank finance may suddenly become unavailable for purchases. The reasons can include issues with the property’s quality, sponsor or property-related financial information, or poor lending markets as credit conditions worsen. When this occurs, purchasers may be able to transfer their financing to a new bank—so long as the seller grants an additional 30-45 days for the closing. Certain rival banks will stop at nothing to close within seven days in order to accept a loan from a rival. However, that would be assuming the borrower and the asset are eligible. They can switch to a 12- to 36-month hard money bridging loan until institutional financing is a possibility if the buyer or the property don’t fit institutional underwriting requirements.
Purchasing an indefinable motel or hotel
Some hotel owners would use hard-money bridging loans until the facility is repaired and stabilized with market-level occupancy and cash flows if it has high vacancies or needs extensive renovations.
Second mortgages hospitality: access the property’s equity
Equity in a property can be accessed through a hard-money second mortgage. A hard-money loan can be used as the down payment for a new hotel or motel by long-term hotel operators. Alternatively, if their first mortgage is about to mature in the next 12 to 18 months, they might wish to take out a loan for significant remodeling and use it to pay off their second and first mortgages before getting a new first mortgage from an institutional lender.
Blanket loans with cross-collateral
An owner-operator who owns a number of indebted hospitality facilities can use a cross-collateral blanket loan to obtain money for capital improvements or to purchase additional property.
Debt repositioning
A sponsor may be brought in to make a cash down payment on the remaining amount during a refinance if a loan matures while interest rates are rising quickly. This makes up for the loan amount, which will probably be lower because of the increased interest rates. An investor can complete their cash-in refinance via a cash-out bridge loan if they own several properties, some of which have sizable equity positions.
Prepare the property with short-term financing for sale.
Owners may decide to make renovations before selling to offer the property as a turn-key hotel to a potential buyer. This is where hard-money loans come in.
Buyout of partners
Relationships break up all the time. One or more investors may own hotels. In the event that the investor wishes to leave the partnership or has passed away. The remaining partner(s) may use a short-term bridge loan to pay the former partner back.
Instances of Closed Hard Money Loans for Hotels and Motels
For owner-operators in the hotel and motel industries. Commercial Lending USA has originated a number of hard money loans in the hospitality sector since 2013. Here are a few notable instances:
Hospitality: $5 million in bridge loans combined
In the early months of the COVID-19 epidemic, a Los Angeles motel was purchased using a first-and-second combination loan. Commercial Lending USA secured two private lenders. The first of which had a 60% loan-to-value (LTV) requirement. And the second of which had a 70% combined loan-to-value (CLTV). The 24-month duration of both loans gave the new owner enough time to boost occupancy. And cash flow when the economy started to recover. The loans were repaid immediately before the 24th month’s maturity.
Hospitality: $2.5 million bridge loan for the purchase of a hotel in Palm Springs
An accomplished operator desired a speedy closing on a small hotel in the desert. Commercial Lending USA obtained a bridge loan with a 65% LTV that closed in 15 days and was repaid with bank financing five months later.
Hospitality: A bridge loan of $1.5 million for a motel in Lake Tahoe
A new owner who used 50% LTV financing purchased an outdated motel close to Lake Tahoe. They intended to refinance into long-term debt and completely remodel the hotel in order to boost revenue.
Hospitality: Second Trust Deed for $3 Million at Bay Area Holiday Inn
The owner required down payment funds in order to close on a site acquisition to construct another flagged hotel, and a cash-out second mortgage with a 40% combined loan-to-value (CLTV) provided them.
Hospitality Terms and Prices for Hard Money in General
Prices for hard-money loans might vary greatly. As a mortgage broker, Commercial Lending USA has access to a variety of financing sources that will assume certain risks in exchange for a return that aligns with their expectations. Certain lenders have cheaper pricing structures in line with their preference for low-leverage loans with 50% LTV or below. Someone with a higher risk tolerance will finance a 70% LTV loan, and they will also charge more for upfront points and an interest rate.
Below are some or all of the closing charges, conditions, and fees that you can anticipate:
Interest Rate: 8.99% to 15.00% is the range of interest rates.
Origination Fee or Points: 1% of the loan balance is equivalent to one point. Higher-leverage or risky loans will have more points than lower-risk loans, which will have fewer. With higher upfront points for second mortgages, which are frequently smaller than first mortgages and have a higher risk profile, the majority of loans have interest rates between 2% and 6%.
Commercial Lending USA charges an underwriting fee on hotel loans that ranges from $500 to $2,000.
Doc Prep Fee: To prepare loan documentation, a lender, broker, or lawyer may charge a doc prep fee of $1,095 to $5,000. Legal document costs tend to be greater.
Credit Report: The majority of hard-money lenders will check the individual credit report of the borrower. The price range is $10 to $15.
Wire Fee: Lenders frequently impose fees for bank wire transfers. These range from $45 to $100 for concluding remarks.
Appraisal Fee: A broker price opinion may run from $150 to $500, but a commercial appraisal may cost $3,000. The property and the lender’s requirements will determine this.
Lender Site Inspection: For loans above $1 million, Commercial Lending USA’s lender, which funds loans from a $25 million credit facility from their bank, requires them to physically inspect the property and meet with the borrower there. The borrower might be responsible for paying the lender’s travel expenses.
Legal Fees: Like a bank or institutional lender, some larger commercial private money lenders may demand a $5,000 to $15,000 deposit to cover legal costs.
Flood Certification: Usually included in closing statements, this is a minor fee of $10 to $25.
General Contractor Review (GC Review): $350 to $750 is the typical amount I see for GC Reviews on closing statements. This is only applicable in cases where the lender is withholding construction money due to a construction component.
Fund Control Fees: initial setup and scheduled inspections: Some lenders employ a third-party fund control company to oversee the completion of work and verify progress by analyzing draw requests for construction loans. The initial payment and any additional fees for each anticipated inspection are made at the escrow closing.
Refinancing Hard Money into an Institutional Loan as an Exit Strategy
There are two methods for repaying hard-money loans: selling the property and refinancing. The main institutional lending options that hotel owners employ to fund their properties are listed below.
Banks
All kinds of banks make loans secured by hotels. A bank that has a depository relationship with the hotel operator frequently finances the buildings.
SBA Credit
For hotel operators, the SBA (U.S. Small Business Administration) offers both the 504 and 7(a) loan programs. The programs are well explained in this Nerd Wallet post.
Hospitality Loans for CMBS
Once the lenders sell them the new loans. Wall Street banks package the institutional loans that typically come from commercial mortgage lenders into Commercial Mortgage Backed Securities (CMBS). Moreover, Investors in fixed-income securities purchase shares or fractions of the CMBS directly or via mutual funds that hold these securities.
REIT
Certain lenders employ the structure of a real estate investment trust (REIT). Moreover, REITs purchase real estate and provide loans secured by commercial real estate.
Individual Funds
A debt fund or mortgage fund that has loans in its portfolio can be considered private capital. They could be able to finance borrowers or properties with a few flaws because of their lenient underwriting standards.
Mezzanine Funding
Mezzanine loans typically originate from institutional lenders or investment funds. And are classified as subordinated loans, meaning they rank lower than other loans that are more senior.
Preferential Stock
A hotel owner may choose to bring in a preferred equity partner rather than incur debt.
In summary hospitality
When they require short-term bridge funding, hotel and motel owners should give hospitality hard-money loans serious consideration. Hard money loans can offer rapid access to finance when bank financing is unavailable or fails. Despite having higher fees and interest rates. Moreover, this important instrument can help businesses grow and succeed. If used properly and with advice from a knowledgeable broker like Commercial Lending USA.
