Financing 101 - Understanding the types of hotel loans available
Securing a hotel loan can be accomplished through 2 primary avenues. The first is funded, in part by the U.S. government agency, The Small Business Administration (SBA). They offer a variety of loan programs to assist small businesses. The second is private or institutional funding, which can come from a retail / commercial bank (i.e., Wells Fargo), a private equity firm, or private investor consortium. The below demonstrates the most common loan types that MTEL has sourced on behalf of its hotel clients.
Small Business Administration Loans
Basic 7(a) Loan Guaranty: The Basic 7 (a) loan program serves as the SBA’s primary business loan to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes.
Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity vary from up to 10 years for working capital and generally up to 25 years for real property
All 7(a) loans are provided by lenders who participate with SBA in the 7(a) program. A key concept of the 7(a) guaranty loan program is that the loan actually comes from a commercial lender, not the Government. Lenders who choose to structure their own loans per SBA's requirements and may receive a guaranty from SBA on a portion of this loan. The SBA does not fully guaranty 7(a) loans. The guaranty which SBA provides is only available to the lender. It assures the lender that in the event the borrower does not repay their obligation and a payment default occurs, the Government will reimburse the lender for its loss, up to the percentage of SBA's guaranty. The guaranty is a guaranty against payment default. It does not cover imprudent decisions by the lender or misrepresentation by the borrower.
Under this program, the borrower remains obligated for the full amount due. In order to obtain positive consideration for an SBA supported loan, the applicant must be both eligible and creditworthy.
SBA offers multiple variations of the basic 7(a) loan program to accommodate targeted needs.
504 Loan Program delivered through a Certified Development Company (CDC): The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide. Each CDC covers a specific geographic area.
Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped.
Microloan, a 7(m) Loan Program: Microloan 7(m) program provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who in turn, makes the microloan to the applicant. The microloan program is available in select locations in most states.
Private / Institutional Loans
The following demonstrates common private or institutional funding that MTEL has sourced for its clients and / or are commonly used in the hospitality industry.
Conventional Loans: Conventional loans are obtained through the banks and other financial institutions. The loan underwriting criteria for most of these lenders are more stringent and the required equity injection is normally higher than 20% of the project cost. Development projects can require higher equity injections.
Mezzanine Loans: These types of loans are similar to second mortgages, except a mezzanine loan is secured by the stock of the company that owns the property, as opposed to the real estate. If the company (usually a LLC) fails to make the payments, the mezzanine lender can foreclose on the stock in a matter of a few weeks, as opposed to the 18 months it often takes to foreclose a mortgage in many states. If you own the company that owns the property, you control the property.
Commercial Mortgage Backed Securities (CMBS) Loans
Hard Lender Loans