To figure out how to pay for business real estate can feel like a high-stakes game. When it comes to securing funding for a new hotel, the rules become even more stringent. Many developers struggle to secure “new construction hotel loans” due to the rapidly changing economy and lenders’ close monitoring of interest rates.
New market research indicates that the cost of loans remains high, despite increased demand for new hotels. Many lenders are only willing to lend 60% to 70% of the home’s value. This makes it more critical than ever to have a well-thought-out plan and professional help before you start the process.
That’s the point of this blog post: to help you understand the complicated world of hotel construction funding. We’ll help you get the money you need by providing expert advice and a clear plan.
This is something that we at HotelLoans.Net have been through. As a company that specializes in hotel real estate finance, it’s our job to make this process easy for you. With a strong network of over 200 real estate investors and private loans, along with extensive experience, we can help you secure the best terms for your project.
Tip 1: Understand Your Hotel Construction Financing Options
There are different kinds of construction loans. Selecting the correct type of financing for your hotel project is crucial to its success. Your decision will depend on factors such as the timeframe available, the project’s location, your business’s financial health, and the desired loan terms. You need to know a lot about each type of loan to make an educated choice and get the money you need.
Bridge Loans and Hard Money Loans
These are “short-term financing solutions” that are meant to “bridge” the gap until longer-term financing can be found. Developers who need to move quickly to buy a property or pay for instant building costs often use them. Hard money loans are asset-based, which means that the value of the property, not the borrower’s trustworthiness, is what protects the loan. These loans are faster and more flexible, with fewer requirements for applying. However, they have “significantly higher interest rates” and shorter payback terms (usually six months to two years). They work great for projects that need to be done quickly, but they’re not a good long-term option.
SBA Loans and USDA B&I Loans
New construction hotel loans backed by the government are a great choice, especially for small businesses. A “SBA 7(a) loan” and an “SBA 504 loan” are two famous programs run by the Small Business Administration (SBA). People like these because they offer “favorable terms,” such as lower down payments, lower interest rates, and longer payback terms (up to 25 years for real estate). It’s easier for lenders to take on new construction projects when SBA loans are available. For similar reasons, the “USDA Business & Industry (B&I) loan” program encourages lenders to fund rural development projects, such as constructing hotels, by guaranteeing loans. “Rural area,” according to the USDA, means any place outside of a city with more than 50,000 people.
| Feature | SBA Loans | Bridge Loans |
| Loan Term | Long-term (up to 25 years) | Short-term (6 months to 2 years) |
| Interest Rate | Generally lower, competitive rates | Higher, often in double digits |
| Purpose | Long-term financing for construction or acquisition | Temporary funding to bridge a gap |
| Application Time | Slower, more extensive documentation is required | Faster, with a focus on collateral value |
| Lender Type | Banks and credit unions (with SBA guarantee) | Private lenders, specialized firms |
HUD/FHA Construction Loans
“HUD/FHA construction loans” are an excellent choice for people who want the safest long-term financing. These loans are outstanding for both new construction projects and home improvements. The Department of Housing and Urban Development backs them. They offer “long-term,” “fixed-rate,” “non-recourse financing” for up to 40 years, which can be a significant amount of debt. Even though the application process is stricter and takes longer, they can be an excellent choice for developers who are committed to their project for the long term because they offer a low interest rate that is locked in and a longer amortization time.
Tip 2: Prepare for Underwriting and Secure Favorable Terms
Securing “new construction hotel loans” is a challenging process that demands a thorough understanding of risk assessment. In underwriting, a borrower’s creditworthiness and the project’s potential are carefully looked at. A lender will look at your funds as well as the project’s expected cash flow. As experts in our field at HotelLoans.Net, we can underwrite for 30 years a capability many traditional lenders lack. This in-depth study helps us identify potential issues and create a loan that will last for decades.
The Importance of a Strong Credit Score
The approval process largely depends on your credit score. A good credit history shows that you are responsible with money and has a significant effect on the terms you’ll be offered. A good score can get you a better loan amount, a lower interest rate, and a better way to pay it back. A good credit score is always a plus, but we know that not all developers have perfect credit. Because we work with over 200 lenders, including private funders, we can help clients with less-than-perfect credit by focusing on the strength of the project and other factors that mitigate the situation.
Loan to Value (LTV) and Loan Amount
“Loan to Value” (LTV) is one of the most essential ideas in real estate banking. It shows how much the loan is compared to the property’s value. A 70% LTV, for instance, means that the loan amount is $7 million for a property that is worth $10 million. If the LTV is higher, you’ll need a smaller down payment. If the LTV is lower, you’ll need to put more money into the deal. Because we work with many lenders, we can get you better LTVs than you could find on your own. This lets you use leverage to its fullest while keeping your capital safe. This is a significant advantage in a market where lenders are typically cautious about the LTV they offer for new construction projects.
Understanding Different Loan Terms
The terms of your loan will determine your financial obligations for years to come, making it crucial to discuss them. You have to choose between a “variable-rate loan” and a “fixed-rate loan.” With a fixed-rate loan, the interest rate stays the same for the life of the loan. With a variable-rate loan, the interest rate can change based on a standard index. A fixed rate is more stable, but a variable rate might be cheaper at first. A “interest-only period” is also usually part of most construction loans during the building phase. In this case, you only pay interest on the money you’ve drawn, not the full capital and interest. This can make paying for the hotel much easier while it’s being built.
Tip 3: Know the Difference: Construction Loans vs. Term Loans
Many people believe that a single loan covers the entire hotel project, from breaking ground to the grand opening. Getting credit is a two-step process. You’ll need to get both a “construction loan” and a “term loan.” Knowing the difference between the two is essential for keeping the project on track.
How Construction Loans Work
Construction loans are “short-term, high-leverage loans” that are made to pay for the construction part of your project. They usually last as long as the building takes, which is generally 12 to 24 months. How the money is sent out is the most essential part of a construction loan. The lender doesn’t give the money all at once; instead, they do it in several “draws” as the project reaches specific goals. A draw might be released after the base is poured, the framing is finished, or the electrical wiring is put in place, as an example. This process makes sure that the lender’s money is used correctly and that the project stays on track. As a general rule, you only pay interest on the amount of money that you’ve drawn, not on the whole loan amount.
Transitioning to Term Financing
The building loan is “paid off” or “converted” into a “term loan” once the hotel is closed and ready for business. This is the start of your long-term debt. As a “permanent loan” or “term loan,” the term loan gives long-term funding for the finished hotel. The time you have to pay back these loans is usually between 10 and 30 years, and the interest rates are better than those on construction loans. You can get different kinds of term loans. Common choices are conventional business mortgages, SBA loans, or even HUD/FHA loans. Each has its pros and cons when it comes to interest rates, repayment terms, and borrowing power. The change from building financing to term financing is a big one, and you need to have a plan ready for this “takeout” loan.
No-Doc and Lite-Doc Loans
“No-Doc and Lite-Doc loans” are an option in some situations, even though they are not very popular. When someone gets one of these loans, they don’t have to show much or any proof of their income or financial past. They aren’t always a good choice for projects because they usually have higher interest rates and less power, but they can save the day when:
- You’re a foreign national who can’t provide standard U.S. tax returns.
- Your financial records are complex, making traditional underwriting difficult.
- Speed is your top priority, and you need a loan funded quickly.
- You have a strong project but a less-than-perfect credit history.
Private lenders primarily offer these loans. They are evaluated based on the strength of the property and your equity stake in the project, not your financial details.
Tip 4: Plan for Working Capital and Other Expenses
Securing loans for new hotels is a significant milestone, but the work isn’t done yet. People who are making things often make the mistake of only looking at how much it will cost to build it. For a hotel project to be successful, there needs to be a thorough financial plan that takes into account costs other than the building itself.
Beyond the Construction Loan Amount
A typical construction loan pays for the building of the hotel itself. However, it doesn’t cover the numerous other bills that arise before the first guest arrives. You will need to include working capital in your budget. This is the cash you will need to pay for things like rent, bills, and marketing before the hotel starts generating significant revenue. The fees for furniture, fittings, and equipment (FF&E) are just as important. This includes everything from TVs and beds to kitchen tools and apps for the front desk. These costs can add up quickly, so it’s essential to have a plan for how to pay for them, whether it’s with a different loan or your own money.
The Role of Bridge Loans in Hospitality Real Estate
Bridge loans are a short-term way to buy a hotel, but they also play an important role in hotel real estate, which we talked about before. They come in handy when you want to buy a current hotel that needs much work or a new location. A “fix-and-flip” or “fix-and-rent” approach is another name for this. A bridge loan gives you the money you need to buy the house and pay for the repairs. After the improvements are done and the hotel’s value and cash flow have gone up, the developer can pay off the bridge loan and refinance into a better long-term loan. This is a common approach to entering the market and increasing the value of an underperforming object.
The New Construction Hotel Loans Process
It can be challenging to understand the process of a hotel loan from start to finish. Here is a shortened, step-by-step rundown of the normal process that shows how we can help you as consultants:
- Feasibility Study and Business Plan: We help you create a robust plan that outlines your project’s market, financial projections, and operational strategy.
- Initial Application and Lender Matching: We utilize our network of over 200 lenders to identify the most suitable financing options for your project, based on the specifics of your application and your preferences for lender matching.
- Underwriting and Due Diligence: We assist you in gathering all necessary paperwork and presenting the strongest case to lenders.
- Getting the Construction Loan: We help you close your short-term construction loan.
- Monitoring the project and managing the draw: During the building phase, we can provide you with advice to ensure the draw proceeds smoothly.
- Moving on to Long-Term Financing: We help you get the long-term loan that pays off the building loan and sets up your business for decades of success.
Our participation guarantees that you will have professional guidance throughout the whole process, from the initial idea to a fully operational hotel that makes money.
Tip 5: Partner with a Specialized Financial Consultant
Securing loans for new hotels is not something that inexperienced individuals can do. Because of the complicated nature of the different types of loans, the strict underwriting process, and the constant need to adapt to changes in the market, you need the help of a trained financial consultant. You get a significant advantage when you work with an expert. You save time and money and avoid possible problems.
Why HotelLoans.Net Is Your Go-To Partner
We are not just brokers here at HotelLoans.Net; we are a dedicated financial consulting firm that specializes in hotel real estate. We are one of a kind in the business because we are both a “correspondent lender” and a “table lender.” This means that we can fund loans directly and also help make deals between over 200 other lenders in our network. With our extensive experience, we can offer comprehensive 30-year insurance, ensuring your project can pay for itself in the long run. We can get you the best terms on a wide range of loan types, from FHA business property investment loans to state income loans and everything in between. We are ready to help you through every step of the process, from the first idea to a successful hotel that makes money. Get in touch with us right away for a free meeting, and we’ll help you build your future.
Conclusion
The process of securing new hotel construction loans can be complicated, but it is possible with the right plan. Here are 5 essential tips to help you navigate the process: understand your financing options, prepare for a rigorous underwriting process, distinguish between construction loans and term loans, plan for all post-build costs, and collaborate with a specialized financial consultant. Every single one of these steps is very important.
There are numerous opportunities to profit from hotel real estate, but there are also many things that could go wrong. You could make costly mistakes and miss out on great chances if you try to figure this out on your own. We offer expert advice and a strong network at HotelLoans.Net to help you achieve your goals. Our goal is to help you achieve your objectives in the hospitality investment property market through personalized, well-thought-out financial solutions. Allow our knowledge to work for you. Don’t let how hard it is to get the money stop you from following your dream.
Are you ready to build your hotel? Get in touch with us right away for a free meeting, and we’ll help you make your dream come true.
FAQs
What is the average interest rate for a new construction hotel loan?
Interest rates on loans for building a new hotel vary significantly based on the type of loan, the lender, and the state of the market. For instance, SBA loans often have low rates that are a spread over the average rate and are usually between 5% and 8%. Because bridge loans and hard money loans are short-term and carry more risk, their rates are generally in the double digits. Lenders look at each project’s unique risk profile, so getting a quote is the best way to get an exact rate.
What documents are most important for securing a loan?
To secure a loan for constructing a new hotel, you will need to submit a substantial amount of paperwork. This includes a comprehensive business plan, an in-depth study of the project’s viability, and a detailed list of all costs involved in the project. Plus, lenders will want to see your financial documents, tax reports, and proof that you have experience in the hospitality or real estate development fields. The better your chances of getting good terms, the more full and professional your paperwork needs to be.
How do lenders assess the viability of a new hotel project?
A complete feasibility study is how lenders decide if a new hotel project will work. This study examines the market and area, considering factors such as demographics, nearby attractions, and competition. The lenders will also look at your financial projections, which include things like expected RevPAR (revenue per available room), occupancy rates, and running costs. They want to see a straightforward way for you to make money, and many people are interested in your suggested hotel.
What is the typical timeline for a new construction hotel loan?
The time it takes to secure a loan for a new hotel build can be lengthy due to the extensive research required. This part of the process can take anywhere from 30 to 90 days, or even longer, based on how complicated the project is and how quickly the borrower responds. The construction part can last anywhere from one to three years after the loan is approved. As the work is finished, the funds are sent out regularly.
What are some common pitfalls to avoid when seeking hotel construction financing?
There are a few common mistakes that can go wrong with your financial plans. One of these is overestimating how much money your project will make, which can make it look too risky. Also, it’s not smart to look at the interest rate and ignore other important factors, such as the fines for early repayment and the terms of recourse. It’s also a big mistake to use the wrong type of loan for your business goals, like a short-term loan for a long-term project. You can avoid these mistakes if you work with a professional.
