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Hard Money & Private Money Hotel Financing
Hard money loans can provide the funds you need to purchase and/or update a hospitality space when a bank loan is out...
First Capital Trust Deeds (FCTD) is an experienced California-based mortgage broker focused on private lending and mortgages for real estate investors nationwide, including the hospitality industry. We’ve helped our share of hotel and motel owners quickly access short-term bridge loans to finance their properties, prior to selling or refinancing into institutional lending. FCTD has long-term business relationships with many private lenders, some of whom own numerous hospitality properties and run private lending divisions. These lenders have proved excellent sources of capital for our hotel/ motel owner-operator clients.
This article will cover many details that hospitality investors and owner-operators should know to make informed decisions on short-term bridge loans for their property. I’ll cover the following topics:
A hospitality hard money loan is a short-term (12-36 month) loan secured by a hotel, motel, bed & breakfast, vacation resort or RV park. Hard money loans, also known as private money loans, are made by individual or non-institutional private mortgage lenders and debt funds specializing in short-term lending. The loans don’t require as much financial documentation as bank or institutional loans, which drives the pricing and closing costs higher.
There are many reasons owners turn to hard money loans. Below are the most common scenarios FCTD has encountered.
Hard money loans can close in as few as 24 hours. However, most take more time for due diligence. If a great property hits the market, an investor can gain an edge with an offer with proof of funds, plus an approval from a hard money loan with a 7-14 day closing.
In purchase transactions, bank financing can fall through at the eleventh hour. The reasons range from problems with the property condition, financial details (property or sponsor), to bad lending markets when credit conditions deteriorate. When this happens, buyers can sometimes switch financing to a different bank – if the seller extends the closing timeline another 30-45 days. Some competing banks will drop everything to close in seven days to take a loan from a competitor. But that would assume the borrower and property qualify. If the buyer or property don’t meet institutional underwriting standards, they can pivot to a 12-36 month hard money bridge loan, until institutional financing is an option.
If the property has high vacancies or needs a major renovation, some hotel owners will use hard money bridge loans until the property is renovated and stabilized with market-level occupancy and cash flows.
A hard money second mortgage can be used to access equity in a property. Long-time hotel owners can use a hard money loan as the down payment on a new hotel or motel. Or, if their existing first mortgage is maturing in 12-18 months, they may want to pull money out for major renovations, and pay off the first and second mortgages with a new first mortgage through an institutional lender.
An owner-operator with multiple hospitality properties encumbered with debt can use a cross-collateral blanket loan to access cash to fund capital improvements, or acquire another property.
If a loan matures while interest rates are rapidly increasing, a sponsor can be brought in to pay cash down on the balance during a refinance. This offsets the likely smaller loan amount – which is a direct consequence of higher interest rates. If an investor owns multiple properties, including some with significant equity positions, they can use a cash-out bridge loan to close on their cash-in refinance.
Prior to selling, owners may renovate a property in order to market a turn-key hotel to a new buyer. Hard money loans are meant for this situation.
Partnerships split all the time. Hotels can be owned by a group of investors. If an investor wants out of the partnership or has passed away, the remaining partner(s) can use a short-term bridge loan to pay out the former partner.
Since 2013, FCTD has originated several hospitality hard money loans for owner-operators in the hotel and motel business. Below are a few noteworthy examples:
A first and second combination loan were used to acquire a Los Angeles motel during the first few months of the COVID-19 pandemic. FCTD secured two private lenders, the first going to 60% Loan-To-Value (LTV) and the second going to 70% Combined Loan-To-Value (CLTV). Both loans had a 24-month term that allowed the new owner time to increase occupancy and cash flow as the economy opened back up. The loans paid off just prior to maturity on the 24th month.
An experienced operator wanted to close quickly on a boutique hotel in the desert. FCTD secured a 65% LTV bridge loan that closed in 15 days and paid off five months later with bank financing.
A new owner used 50% LTV financing for an outdated motel in the Lake Tahoe area. They planned to fully renovate the hotel to increase revenues and refinance into long-term debt.
A 40% Combined Loan-To-Value (CLTV) on a cash-out second mortgage provided the owner with down payment funds to close on a land acquisition to build another flagged hotel.
Hard money loan pricing can be all over the map. Since FCTD is a mortgage broker, we have numerous capital sources that will take on certain risks for a price that meets their expected rate of return. Some lenders like low-leverage loans at 50% LTV or less, and will have a lower pricing structure to match. Others with a higher risk tolerance will finance a 70% LTV loan, and charge more for upfront points and a higher interest rate.
You can expect to see some or all the closing costs, terms and fees below:
Selling the property and refinancing are the two ways to pay off hard money loans. Below are the primary institutional lending options that hotel owners use to finance their properties.
Banks of all sizes loan against hotels. It’s common for a bank with a depository relationship with a hotel owner to finance the buildings.
The SBA (U.S. Small Business Administration) provides both the 7(a) and 504 loan programs for hotel owners. This article from Nerd Wallet does a good job explaining the programs.
Commercial Mortgage Backed Securities (CMBS) are institutional loans, often originated by commercial mortgage lenders that sell the new loans to a Wall Street bank, which bundle the loans into CMBS. Fixed- income investors buy shares or portions of the CMBS either directly or through mutual funds that invest in these securities.
Some lenders are set up as a Real Estate Investment Trust (REIT). REITs both buy properties and lend money against commercial properties.
Private capital can be a mortgage fund or debt fund that holds loans in their portfolio. They may have lighter underwriting requirements that can finance borrowers or properties with a few blemishes.
Mezzanine loans are subordinated loans, meaning they rank below other more senior loans, and are usually from institutional lenders or investment funds.
Instead of taking on debt, a hotel owner may bring in a preferred equity partner.
Conclusion
Hospitality hard money loans are an important financial option for hotel and motel owners to consider when they need short-term bridge financing. Although hard money loans come with higher fees and interest rates, they can provide quick access to capital when bank financing falls through or isn’t available. With proper planning and guidance from an experienced broker like FCTD, this valuable tool can help businesses thrive and succeed.
Jul 6, 2023 by Ted Spradlin
Hard money loans can provide the funds you need to purchase and/or update a hospitality space when a bank loan is out...
Jul 6, 2023 by Ted Spradlin
When it comes to acquiring or renovating hospitality properties, investors often turn to an alternative financing...