Factors Affecting Hotel Loan Financing

Hotel financing approval goes beyond credit history - Nevistas

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. August 12, 2009

AUGUST 12, 2009 - Getting hotel loan financing is a major business decision. With this in mind, a basic understanding of the factors involved is of the utmost importance. This article will give you an overview of the most important of these factors.

With that said, please bear in mind the current market environment. For good reason, lending institutions are extremely cautious these days. Construction and development loans are difficult to come by and if you do get approved, expect to pay higher than normal rates. Acquisition and refinance loans are taking priority today.

Before reading the list of items below, remember this important tip. Do not try to hide, massage or exaggerate any of the financial or project documents you submit for the loan due diligence process. Doing so will just waste your time and the banks... it's not worth it. Be upfront and be honest and the financing institution you are working with may possibly surprise you with a number of solutions. Hotel financing is rarely if ever a smooth ride.

Controllable Factors

These are factors in which you have some measure of influence. These factors all have importance in the financing of a hotel and can determine approval as well as interest rates and overall cost of the financing:

o Appraisal of property

o Debt service coverage

o Income history of property

o Length of loan

o Loan amount

o Loan-to-value ratio

o Management experience

o Occupancy rate

o Personal income/credit history

All of these factors work in conjunction with one another to assess the risk that you and/or your hotel pose. In any loan, there is a risk associated with the borrower as to the likelihood that the loan can be repaid. The lower the risk you pose, the more affordable the financing will be.

Good Occupancy History

If you are looking for financing for an already existing property, the occupancy history of the hotel will be the most important variable in the financing equation. A strong, consistent history of occupancy means a strong, consistent flow of cash.

Recognizable Flagship Name

The hotel industry is dominated by franchises stemming from recognizable names. A lending institution wants to see a name that they and consumers will recognize. They also like the fact that franchises have nationwide marketing campaigns at their disposal. All of this helps to increase the future profitability of your hotel.

High Traffic Location

A hotel located off the beaten path is not going to grab travelers at the rate that a hotel in a high-traffic area will. If your hotel is new, the surrounding environment will be a significant factor in determining the property's potential cash flow. The better the location, the better your chances of getting the proper financing.

Proven Management

A business is only as good as its management in the long run. Most businesses fail because of poor management and banks will take into consideration the management history of the person who will run the property. If you have no management history, then you will have to rely on other factors to obtain hotel loan financing. A good management history will help in the application process and lead to favorable interest rates.

Uncontrollable Factors

These are factors in which you have no influence. Nonetheless, these factors can be very important when it comes to determining the overall cost of your hotel loan:

o Bond market

o Current economic conditions (local and national)

o Expected future economic conditions (local and national)

o Lender portfolios

o Market capitalization rate

These are all factors that evaluate the risk the environment poses to commercial lending, as well as the lending institution's ability to lend money. For example, a lending institution has a ceiling on the amount of money it can lend. As the ceiling gets closer to being reached, the lender becomes more stringent in the approval process.

You should keep in mind that all these factors do not need to be in your favor in order to be approved for hotel loan financing. If you have the controllable factors in order and the economic conditions are fair, you should be able to obtain affordable hotel financing.