Financing a Hotel: The Ultimate Guide By Acfa-Cashflow


For more than three decades, Acfa-Cashflow has provided commercial loan and real estate sales services to its clients. For decades, we have financed major commercial real estate loans, including one of our favorite types of financing, hotel financing.

Hotel financing isn’t the only service we offer; we can also provide hotel purchase and sales brokerage services from start to finish.

Turn to for incomparable, professional, yet highly personalized and amazingly fast service with great outcomes when you require a hotel loan or any hotel or hospitality transaction services. The following topics are covered in detail:

  • Hotel Loans: What You Need to Know
  • Requirements for Financing and Options
  • Metrics That Are Beneficial
  • The Best Lenders for Hotel Loans
  • Transformation & Conversion
  • How to Purchase a Hotel
  • Options for Refinancing
  • Types of lodging
  • Hotel Schemas of Classification
  • Non-Flagged Properties vs. Flagged properties
  • Franchising in the Hotel Industry
  • Using Acfa-Cashflow’s Resources to Our Advantage
  • Resources that can be found online

How to Get a Hotel Loan

Refinancing, rehabilitation, and acquisition of hotels are all part of what Acfa-Cashflow does for hotel owners and operators. The cost of hotel construction can have a significant impact on the amount of money you need to get your project off the ground.

In comparison to other types of properties, securing hotel finance and hotel construction loans might be more financial difficulty. This is especially true if you’re working on a high-end, boutique, or unbranded hotel project. If you’re seeking for a hotel construction loan to fund new construction, conversions, or restorations, this is also a possibility.

There are many times when the borrower’s determination of NOI does not fully line with the hotel lender’s underwriting, which means the latter often applies underwriting changes based on occupancy levels and other factors such as franchising marketing and management as well as FFE (FF&E).

To secure long-term hotel financing for properties other than the most recently developed, lenders must be convinced that their collateral will not be down-flagged or become un-flagged during or at the end of the loan period or at the end of the loan term.

Options for Hotel Debt Financing

Consolidating real estate and business loans into a single hospitality financing facility is a common practice among lenders. The hotel building itself is given as security for the hotel loan.

As a result, the loan must be approved in the same manner as a conventional commercial real estate loan. There is also a need to demonstrate that the hotel industry is a viable and financially healthy enterprise.

There are numerous ways to get money for a hotel. It’s all up to you which route you decide to take:

  • Refinance a hotel debt currently in place
  • Renovation of a hotel
  • Invest in a hotel that has already been built.
  • Invest in a new lodging facility
  • This last choice necessitates a hotel building loan.

Financing Requirements for a Hotel

Certain metrics are employed by hotel lending underwriters when deciding whether or not to approve a potential loan. The viability of a hotel project is often evaluated using a specific set of underwriting standards that each hotel lender employs.

Hotel Revenue Per Available Room (RevPAR), which is determined as the hotel’s average occupancy multiplied by its daily rate, is the most commonly used indicator for evaluating hotels. Refinancing or using a hotel loan for remodeling is extremely crucial in this case. Read on to find out more.

Investors frequently want to compare your hotel to others in the area. Acfa-Cashflow can assist in yet another area. In the hotel finance process, we combine market knowledge and expertise to provide genuine, tangible value to our clients.

Hotel Preliminary Assessments

In order to ensure the accuracy of your forecasts and proformas, you should do thorough feasibility studies for hotel construction projects. Your agreement must be “proved up” to the funding source.

Your new hotel’s impact on local supply and demand must be demonstrated in these studies. In addition, hotel construction loans are distinct from other types of hotel finance in that they are a whole new process.

The Financial Factors

Understanding the financial aspects of a hotel property will help determine how much debt you can take on and how much equity is needed to finish the acquisition. Obtaining the greatest amount of debt possible is a primary goal for some debtors (smallest down payment).

A high-leverage facility’s debt service requirements can’t be met by the property’s value. In order to get a loan from a good lender, a hotel project’s actual or expected financial metrics are taken into consideration.

For Hotel Lenders, these metrics are critical.

This is the hotel’s daily average room rate multiplied by the hotel’s occupancy percentage. When a hotel’s RevPAR Index (i.e., its RevPAR as compared to that of its competitors) reaches at least 90%, it is considered stabilized (i.e., ready for long-term financing).

Income minus operating expenses is known as Net Operating Income (NOI). The NOI expense ratio is calculated by dividing net operating income (NOI) by operating expenses (OpEx). Lenders may use the three-year estimated annual NOI at a 100% RevPAR index to determine the size of a hotel bridge loan.

Unleveraged value equals NOI divided by comparable hotel values, which is the Cap Rate (the comps). A loan-to-value ratio can be used by lenders to estimate the size of a hotel loan. Having a lower cap rate makes a property more valuable. As a result, a hotel with a high cap rate will be less valued.

Lenders calculate the hotel loan’s debt yield by dividing the NOI by the loan amount. All other things being equal, a greater debt yield means a smaller hotel loan amount.

NOI minus debt servicing costs, management fees, reserve funds (such as reserve funds for FF&E) for one-time capital expenditures and depreciation is known as net cash flow (NCF).

As a rule, hotels can get financing with a loan-to-value ratio (LTV) of at least 70%. SBA-guaranteed loans can have loan-to-value ratios of up to 90%.

The overall amount of money invested in the hotel project is known as the “total cost basis.” It is possible that the cost basis differs from the current value, which could have an impact on a refinance or a purchase.

Due to prepayment penalties, the interest rate is either defeasible or maintained. It’s possible for borrowers to reduce prepayment penalties in a variety of methods, including:

In this scenario, the borrower can sell the hotel while still owing money on it, and the new owner (the buyer) picks up the tab for any outstanding debt when the hotel is sold.

More Borrowing: Some lenders permit further borrowing after the closure, frequently through mezzanine finance. The seller’s discount to market value is reduced since the hotel buyer can assume the senior loan and add extra debt after closing.

It is common for non-recourse hotel loans to have a 90-day prepayment grace period at the conclusion of the term. This can save the borrower money because the lender can price in a longer open time.

Loans from Hotels’ Lending Partners

Starting at $20 million, banks are a major source of our hospitality finance. To finance the construction of a hotel, the acquisition of a hotel, the refinancing of a hotel, or the renovation of a hotel, we rely on a wide network of local, regional, and national banks. Banks often lend up to a 70% loan-to-value ratio for hotel finance.

Of course, banks want to lend money to those who have good credit and a track record of responsible financial behavior. In contrast, Acfa-Cashflow provides hotel financing to borrowers with less-than-perfect credit histories.

Banks can offer construction loans or bridge loans to help with the cost of building a hotel. Both have periods ranging from 18 months to 5 years and charge solely interest. The revolving lines of credit offered by banks can be used for both reconstruction and FF&E purchases.

Small Business Administration (SBA) Loans

The Small Business Administration has a few loan guarantee programs for hotels.

85% LTC and a 25-year term are possible under the SBA 7a Loan Program, which provides up to $7.5 million in loan guarantees.

Commercial real estate and equipment can be purchased with loans up to $15 million under the SBA 504 Program. A maximum LTC ratio of 85% and periods of up to 25 years are available.

Energy Efficient 504 Program: The SBA Energy Efficient 504 Program can finance green hotel projects of up to $20 million and greater, with a 90% LTC ratio and periods from 10 to 25 years. It is only available for initiatives that focus on reducing energy use or using renewable energy.

Financing for rural hotels provided by the USDA

The USDA’s Business and Industry Guaranteed Loan Program provides financing for rural hotels. LTC ratios of up to 90% and periods of up to 30 years are available for hotel loans of up to $12 million.

Other Financing Options for a Hotel

In order to provide funding to franchisees, the franchisors can self-finance or cooperate with lenders. A comfort letter and adherence to the Property Improvement Plan (PIP) guidelines are common prerequisites. A franchisee’s PIPs mandate that he or she spend money on FF&E and energy efficiency modifications in order to maintain the brand’s requirements. The SBA, banks, and mezzanine lenders can all provide financing for PIPs, but franchisors may also offer this option.

Companies like real estate investment firms, insurance companies and pension funds are among the non-bank private lenders that can provide hotel finance. When debtors don’t fulfill bank underwriting norms, private lenders are an essential source of hotel finance.

For high-end properties, CMBS Conduit Loans offer competitive rates. Non-recourse, fixed-rate loans with periods of up to 10 years on a 30-year amortization typically have an LTV ratio of 75 percent.

Financing for the construction of hotels

Building a new hotel is, without a doubt, the most difficult way to finance a hotel. Like starting a new business, finding the best funding for a hotel development project is similar. In both cases, the most striking commonality is the absence of any prior performance history.

Construction loans for hotels and refinancing for hotels are fundamentally different in that you build collateral during construction loans for hotels.

With hotel building financing, a lot of money is needed to get started. Large construction down payments and a lengthy development phase should be factored into your hotel financing plan.

This phase includes obtaining an occupancy certificate and opening a hotel. Financing must also last through this time period. As a result, the loan must be significant enough to cover the hotel’s debt and operational expenses.

Banks and other lending institutions participate in Assets Americahotel ®’s development and bridge credit program. The SBA and USDA, for example, provide loan finance guarantees for hotel construction and FF&E costs. As an alternative, hotels can make arrangements to lease FF&E.

Conversion of Hotels and Refurbishment of Hotels

Financing for hotel renovations is used to make upgrades that raise the property’s resale value and extend the hotel’s useful life. A renovation reserve account can be used to self-fund improvements.

While many hotels prefer to finance hotel renovations outside, this isn’t always the case. Due to PIP regulations, franchisees must keep their properties up-to-date, which can demand a large amount of refurbishment financing.


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