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Get a commercial mortgage for a hotel property is very similar to obtaining a commercial mortgage for commercial property owners to subtle differences. The driving force for the majority of revenue is the hotel RevPAR, or revenue per available room. RevPAR is the most often calculated by multiplying the price of hotel per room per day (ADR) and occupancy rates is a key performance indicator. The increase in RevPAR is an indication that the occupation is improving, the ADR is increasing, or a combination of both.
While the RevPAR only assesses the strength of the room revenue is often the most relevant indicator of performance. While many full service hotels to generate revenue through other means such as restaurants, casinos, conferences, spa services or other hotel facilities are more limited service limited service marked goods or UNFLAGGED properties. A limited service hotel is just a hotel with a restaurant. Because of the costs of running the restaurant component generally run higher than the operations of the hotel, it is common for net operating income (NOI) as a percentage of total sales lowest for a full service "a limited service hotel. For this reason, most commercial lenders prefer to finance limited service hotels.
Flagged vs. Unflagged Properties:
A hotel property is simply marked a hotel belonging to a national franchise. An example of a property marked is a Holiday Inn or Best Western. For the customer, a property marked has the advantages of a uniform standard that is confirmed by the franchisor. A guest can stay in a property marked on the east coast and, predictably, the same flag on the west coast have the same level of cleanliness and service. The property owner gets the benefit of a reservation system and marketing nationwide. For this service the operator is required to pay a fee that, in general, room can be between 5% to 10% of sales. Because of the advantages that property were reported, most commercial lenders prefer to finance a property UNFLAGGED. It can sometimes be extremely difficult to obtain a commercial loan from a building UNFLAGGED, especially if there is property in what is considered a tourist destination.
A destination resort area would be an area like Miami, Myrtle Beach, or Orlando FL. An unflagged property in a destination resort is easier to obtain a commercial loan on than an unflagged property in other areas of the country.
Exterior Corridor vs. Interior Corridor:
A property is a corridor outside the hotel grounds where you can see the door of the room away from the property. These are sometimes called in a motel instead of a hotel. The term derives from the hotel motel run the engine where the majority of travelers to park their cars right in front of your room. Though there are disagreements between what defines a motel and what defines a hotel, there is usually little difference between the external perception of two lenders too. Most properties outside the corridor are older and then not have the quality of the furniture and will have more maintenance than a property of an interior hallway. An interior corridor property will be more energy efficient and have lower utility costs as a percentage of gross income.
Financing Your Hotel Property:
When trying to get a commercial loan for your hotel property there are a few distinct differences you can expect as opposed to financing other commercial properties. A hotel property is considered special purpose in nature which simply means that it is generally cost prohibitive to convert it to alternate use. An office building or retail space can accommodate numerous types of businesses whereas a hotel property can only accommodate a hotel. Because of this a commercial mortgage for a hotel is going to be considered riskier to the lender than a commercial mortgage for other general purpose property types. A lender will mediate this risk by taking a more conservative approach to underwriting a hotel property.
The loan to value (LTV) for a hotel property will be lower than other general purpose property types. For a limited service, flagged property 65% LTV is typical and that number can go down depending upon the age of the property and whether its interior or exterior corridor. The LTV is simply a ratio calculated by dividing the loan amount by the value of the property. The debt service coverage ratio (DSCR) for a hotel will also need to be higher than that of a general purpose property type. The DSCR is a ratio that determines the strength of the property or business income in relation to the proposed mortgage payment. A typical required DSCR for a hotel property by a commercial lender is 1.30 which simply means that for every $1.00 in proposed mortgage expense there should be $1.30 available to pay it. For other general purpose property types the DSCR is lower. A DSCR of 1.20 is common for general purpose property types and can go oven lower for a less risky property such as an apartment building.
Because the acquisition of a hotel property under a conventional program requires a large capital injection, many borrowers prefer to purchase a hotel property by utilizing the SBA 504 program. This program enables the borrower to put in as little as 15% and still obtain a better interest rate than a traditional commercial mortgage for a hotel.
