Hotel Mortgage Debt Refinancing
If your hotel mortgage loan is maturing soon or if you feel your interest rate is too high, then it is time to refinance. Additionally, many owners refinance their hotel(s) after several years of paying down their debt to harvest their equity (and get their “cash out”) by increasing the Loan-to-Value (LTV) ratio (amount of leverage) of the refinancing loan, so they can purchase or develop more hotels. We can assist you with this by providing a new and attractive permanent mortgage. Many different loan products are available for this purpose, such as Government Guaranteed, Conventional, CMBS, Life Insurance Company, C-PACE, Mezzanine, and Preferred Equity. We can assist you to decide which loan product is best for you to employ to achieve your objectives, and then we will arrange that type of financing by working closely with you and the appropriate lender through the closing and funding of the loan.
How can Spirides Hotel Finance Company assist with my hotel mortgage debt refinancing?
Spirides Hotel Finance Company provides exceptional service to hotel investors who want to refinance their mortgage debt or who currently have no debt on their property but would like to obtain a mortgage to cash out funds to deploy elsewhere. As one of the United States’ leading hotel financing providers, we are constantly in contact with dozens of different sources of capital around the country to negotiate and arrange the best financing terms available for our customers. Once our services are engaged, we work closely with our customers to collect all the required documents necessary to put together a very complete, accurate, detailed, and compelling loan application package to present to dozens of our hotel capital sources. After our capital sources review the loan application package, they report back to us on their level of interest and specific financing terms. We then notify our customers of our capital markets canvassing results and present to them all the different available financing options, explain the differences, and assist them to decide which financing option would be best for them to employ to achieve their financing objectives. We work hard to obtain the lowest interest rates and lender fees and most favorable terms and conditions possible for our customers. We stay involved in every step of the process up until the transaction is closed and funds are disbursed. We do everything in our power to facilitate and expedite the closing process with each customer’s new source or sources of capital. We earn and are paid our fee only after the successful closing and funding of each financing transaction that we arrange.
What Financing Products can be Employed for a Hotel Mortgage Debt Refinancing?
Spirides Hotel Finance Company provides our customers with different types of debt and equity financing products to create the capital stack which is used to fund the refinance of a hotel’s mortgage debt. Two of the primary differentiators in selecting financing products is our customer’s (the borrower’s) choice between low lender fees or a high Loan-to-Value (LTV) ratio. Then, they might have a choice between a fixed interest rate or a floating interest rate. Additionally, sometimes borrowers may have a choice between a personally guaranteed “recourse” or a non-recourse type of loan.
Government Guaranteed Loans
Through our expert knowledge of the loan programs developed by the United States Small Business Administration (SBA) and the United States Department of Agriculture (USDA) we assist hotel investors nationwide to obtain very attractive financing for their businesses. These government programs provide senior lien permanent mortgage loan type of financing. If a hotel buyer is searching for a long-term loan with a 20-30 year term and a 20-30 year fully amortizing payment schedule and up to an 85-90% LTV ratio and a reasonable rate of interest, they should consider the new and improved loans offered through the SBA, as well as the USDA (in rural areas). Loan amounts for these types of loans can range up to fifty million dollars ($50,000,000), and they are available to fund any type and size of hotel— franchised or independent. The reason these loans are called government guaranteed loans is because if the borrower defaults on this type of loan the federal government will reimburse/pay the lender up to 70-80% of the amount of any losses of their loan principal. This guarantee gives the lender a much better comfort level with and thus a higher probability of approving a loan request than would be the case without such a guarantee. The lender will require the owners of the company to personally guarantee this type of “recourse” loan.
By utilizing the SBA 504 Green Loan Program a single hotelier can obtain multiple SBA loans for multiple “green friendly” hotel debt refinancing with renovation or expansion projects with no limit on the lender’s 1st mortgage; thus, there is no limit on the size of these projects as long as they are financially feasible. In many cases, qualified borrowers with projects exceeding $20 million can still obtain up to 85-90% LTV financing. SBA 504 “Green” loans are made to fund renovation or expansion projects that retrofit the hotel to reduce energy consumption by at least 10%. Additionally, SBA 504 Green loans can fund physical plant, equipment, and process upgrades to generate renewable energy (via solar, wind, turbine, thermal) to power the hotel. These upgrades must result in the hotel generating more than 15% of the energy it uses.
By employing SBA’s new 504 Green Loan Program there is no limit on the number of SBA 504 green projects allowed to each borrower which means that business owners looking for additional 504 financing may be eligible even if they have committed or outstanding SBA loans. This means funds for this program are not limited by the SBA’s usual aggregate lending limit of $5 million per borrower, which means business owners who previously reached their SBA exposure maximum now have the ability to receive additional SBA loans. Another attractive feature of the SBA 504 loan program is that these loans have a fixed interest rate.
Conventional loans are mortgage loans secured by a senior position lien on the property’s title that have traditionally been made by banks and credit unions although today private equity debt funds, life insurance companies, and mortgage REITs are increasingly making these types of loans. Conventional loans have a specified term in years until loan maturity and an amortization period of up to 20 years and typically offer a fixed interest rate that resets every 3-5 years. For hotel mortgages, the LTV ratio of conventional loans is typically in the 60-75% range. These loans are usually made with funds directly from the lender’s balance sheet and are held on the lender’s balance sheet for the duration of the loan. These loans are not backed by any government agency in case of borrower default. These loans usually have the most favorable interest rates and repayment terms for borrowers and the least amount of fees, but they have strict underwriting standards and therefore are the most difficult to obtain. The lender typically requires the owners of the company to personally guarantee this type of “recourse” loan.
The acronym CMBS stands for Commercial Mortgage Backed Security. This type of loan is “non-recourse” and does not require the personal guarantee of the owners of the company, and it is secured by a senior position lien on the property’s title. These loans have a low, fixed interest rate for 5, 7, or 10 years and are bundled together with dozens of other commercial real estate loans and sold off as a security on Wall Street. To protect the rights of the bondholder investors who buy these bonds, some of the borrower’s less favorite attributes of CMBS loans are the springing cash lockbox provision which is triggered in case of any default, high defeasance (pre-payment) penalties, and rigid special servicer personnel who borrowers have to deal with in case of exigent circumstances.
At the other end of the hotel capital stack, opposite the debt layer, is located equity, which is divided into two types–preferred and sponsored (which is also known as common, direct, or JV equity). Equity provides the highest returns for investors because these company owners get paid last in case of the failure of the business, and therefore they have the highest risks, and they are compensated accordingly. By adding a layer of preferred equity on top of the debt in a capital stack, a hotel can be refinanced with just 15% owners direct equity.
The fundamental difference between preferred equity and sponsored equity is that the preferred equity generally has a minimum return requirement (typically paid monthly, like a mortgage payment), and the preferred equity holders get paid their minimum returns first, and then the sponsored equity holders get all that is remaining. The sponsored equity holders are able to obtain the highest returns because they are paid absolutely last, after all the other capital stack participants have been paid.
In the capital stack between the mortgage debt and equity, a layer of “mezzanine” subordinate debt can be inserted. With its origin in the Latin language, the word mezzanine means “in the middle.” Mezzanine funds generally constitute no more than 20% to 30% of the total capital stack, and the owner of the property generally sees obtaining mezzanine debt as a welcome substitute instead of giving up any ownership equity. Mezzanine debt may be a desirable substitute for equity because it is slightly less expensive than equity, and the borrower does not have to take the mezzanine lender on as an equity partner. Mezzanine loans generate significantly higher returns (have higher interest rates) than mortgage debt. In the event of a borrower default the mezzanine lender is paid second, in the middle, after the senior and any junior mortgage holders and before the equity investors. Thus, their risk and reward is in the middle. They have moderate returns and moderate risks in exchange for being paid after the debt capital but before the equity capital. By adding a layer of mezzanine debt on top of the senior debt in a capital stack, a hotel can be refinanced with just 15% owners direct equity.
If a hotel mortgage refinance project has a large PIP renovation component and if the hotel is located in a state that has enacted C-PACE legislation, some amount of C-PACE financing might be a good option for the owner to consider. Commercial Property Assessed Clean Energy (C-PACE) is a state policy-enabled financing mechanism that allows building owners and developers to access the capital they need to make energy related deferred maintenance upgrades in their existing buildings, support new construction or expansion costs, and make renewable energy accessible and cost-effective.
C-PACE makes it possible for commercial property owners to obtain low-cost, long-term financing for energy efficiency upgrades, water conservation upgrades, building envelope upgrades, and buy renewable energy components of a building. Hotels qualify for C-PACE financing. C-PACE can be used to pay hard, soft, and associated costs connected to mechanical, electrical, plumbing, building envelope, and renewable energy sources. Examples include HVAC, LED lighting, facility controls, boilers, windows, and solar panels.
The program starts with a state-level government policy that classifies clean energy upgrades as a public benefit – like a new sewer, water line, or road. These upgrades can be financed with no money down and then repaid as a benefit assessment on the hotel’s property tax bill over a term that matches the useful life of improvements and/or new construction infrastructure (typically ~20-30 years). The assessment transfers on the sale of the property or can be pre-paid. While facilitating sustainability efforts, C-PACE reduces property owners’ annual costs and provides dramatically better-than-market financing for “green” elements of a large renovation or expansion project.
C-PACE is the perfect way to reduce the amount of required owners equity and fill the capital stack or a financing gap in a project up to 95% LTC without using expensive mezzanine or preferred equity financing, and this type of financing does not require any personal guarantees. C-PACE rates are 50% less than mezzanine debt and preferred equity, and by using C-PACE instead of those more expensive traditional financing products this significantly reduces the project’s weighted average cost of capital, improves the IRR, and creates more free cash flow.
The U.S. states that currently have active C-PACE programs are AK, CA, CO, CT, DE, FL, HI, IL, KY, MA, MD, ME, MI, MN, MO, MT, NE, NJ, NV, NY, OH, OK, OR, PA, RI, TN TX, UT, VA, WA, WI & DC.
What Things are Considered when I apply for a Hotel Mortgage Debt Refinancing?
Many qualifying factors are considered and a lot of documentation is required by lenders when they underwrite a hotel mortgage debt refinancing application. It is a good idea for borrowers to know about these factors and the list of required documentation prior to beginning the loan application journey so they can manage their own expectations and submit the most complete and compelling loan application package possible. This will give their loan application the highest possible chance of being approved by the lender. Spirides Hotel Finance Company only presents complete, accurate, and very detailed loan application packages to lenders for their consideration. By doing this, it greatly reduces the chance a lender is misinformed so they will not come back later in the process and change the terms that they originally quoted to the borrower to less favorable terms. Sometimes lenders will do this after borrowers pay their large due diligence / good faith deposit. This can happen, for example, when the loan underwriters do not receive a complete, accurate, and detailed loan request package containing all finalized renovation contractor and FF&E / OS&E cost amounts prior to the beginning of the underwriting process. When lenders receive inaccurate and incomplete information from borrowers it can delay the process and sometimes result in a loan denial. This is why we ask a lot of questions and request a lot of documentation at the beginning of the loan application journey, before the lender’s formal underwriting begins.
Some of the qualifying factors important to hotel mortgage lenders are:
- Amount of cash the borrower has available as well as the amount of post-closing liquidity
- The location of the hotel, including local area business demand drivers
- The proposed loan amount (can the existing cash flow of the property service the proposed new debt?)
- The hotel brand franchise, if applicable
- The immigration / citizenship status of the investors to determine if they qualify for certain government guaranteed lending programs
- The valuation of the property as set forth by a professional appraisal.
- The background of the investors including FICO scores, total available liquidity, net worth, debt-to-net worth ratio, global debt service coverage and cash flow analysis of all affiliated companies, tax liens, bankruptcies, criminal arrests, civil judgements, loan defaults, and real estate short sales to name a few areas of focus.
- The background of the real estate including any environmental contaminants, encroachments or easements noted on the land survey, Geotech subsurface soils, historical preservation, and native American archeology to name a few of the subjects researched.
- Qualifications of the contractors, if a renovation is part of the financing.
Some of the documentation that is required by hotel mortgage lenders includes:
- Resumes of each owner/investor of the borrower company who owns or will own 15% or more of the company.
- Personal Financial Statement—each owner of the borrower company who owns or will own any percentage of the company must submit a current personal financial statement (signed & completed within the last 60 days).
- Personal Credit Report of each owner of the borrower company
- Business Debt Schedule(s)—This schedule should be completed for each separate business entity that each owner of the borrower company owns 15% or more of and which has commercial debt.
- Last 3 years business federal income tax returns of the borrower company and for each separate business entity that each owner of the borrower company owns 15% or more of.
- Last 3 years individual federal income tax returns for each owner of the borrower company who owns or will own 15% or more of the company.
- Current year-to-date detailed profit and loss statement and balance sheet for the borrower company.
- Promissory Note(s) to be refinanced/paid off as well as a copy of the Settlement Statement from the last loan closing.
- Real Estate Appraisal of the subject hotel, produced by a nationally recognized independent third-party, hotel industry expert consulting firm such as HVS and dated within the past 12 months. A professional appraisal should be performed to establish market value for lender LTV calculations. Appraisals must be ordered by the lender and may be transferred to another lender if/when needed.
- Franchise Agreement (fully executed copy), if applicable.
- STAR Report by STR, Inc. (monthly report option) describing the supply and demand and operating statistics of the subject hotel property’s competition in the local submarket (generated within last 60 days).
- Renovation Detailed Cost Estimate produced in writing by the general contractor or contractors as well as a copy of the brand franchisor’s PIP report, if applicable.
- FF&E Quotation / Proposal–produced in writing by the FF&E supplier, if a renovation is part of the financing.
- OS&E Quotation/Proposal–produced in writing by the OS&E supplier, if a renovation is part of the financing.
- List of Renovation Project Costs & Expenses Already Paid by Owners Cash Equity
- 5 year pro forma (forecast) detailed annual profit and loss statement, divided by future year columns (i.e. Year #1, Year #2, Year #3, etc.)
- Borrowing company’s legal formation documents (i.e. articles of organization, operating agreement, IRS Form SS-4, etc.).
- Written explanation of any Working Capital or Cash Out component of the loan request