Get Flexible CMBS Financing for Your Hotel, Motel, or Resort
If you’re looking to finance a hotel or hospitality property, a CMBS loan could be a great choice. Global hotel and hospitality industry revenue is projected to run upwards of $300 billion in 2022 alone, making it a highly profitable industry for many who own or operate hotels, motels, or resorts. However, in order to maximize profits, hoteliers and hospitality operators need the right kind of financing. Unfortunately, many banks and private lenders don’t like to lend to hotels due to the perception of high risk, but fortunately, most CMBS lenders don’t share the same hesitation.
Like CMBS and conduit loans for other property types, CMBS hotel loans are generally fixed-rate, non-recourse, and fully assumable, which helps reduce the financial burden and legal risks for the borrower, while potentially making the property easier to sell off without facing a burdensome prepayment penalty.
Common Uses for CMBS Hotel Loans
Acquiring a new property: A CMBS loan is often the best way to finance the acquisition of a hotel property. In general, CMBS lenders look for borrowers with some amount of hotel ownership or management experience. Properties will ideally be located in strong tourist markets with good historical cash flow.
Refinancing: If you currently own a hotel with an expensive bank, SBA, or hard money loan, a CMBS or conduit loan could be the perfect way to refinance it, lowering your interest rate, reducing your monthly expenses, and increasing your profit margins.
Repairs/FF&E: If your hotel needs some type of repairs or rehabilitation, a CMBS loan may be able to help finance it, but only in limited circumstances. CMBS loans often offer cash-out for refinances, which can sometimes be used for property repairs or upgrades. Sometimes these repairs are minor, but in other cases, they involve a full upgrade of a certain part of a property, such as property-wide appliance replacements, a full overall of HVAC systems, brand-new roofing, or a property-wide interior design upgrade. These more comprehensive repairs are often referred to as FF&E (furniture, fixtures, and equipment) upgrades. However, it’s important to check your potential CMBS pooling and servicing agreement (PSA) before making any FF&E plans. This is because many CMBS lenders will not allow repairs that significantly alter the value of the underlying collateral of the loan. However, if you own multiple hotels, motels, or resorts, you can use the proceeds of a CMBS cash-out refinance on one property to pay for repairs on another property not financed using CMBS debt.
CMBS Financing is Available for Boutique Properties, Flagged Hotels and Motels, and Resorts
CMBS hotel loans can finance a variety of property types, including:
Boutique Hotels: Boutique hotels are unique properties that are not flagged or branded by a major brand or franchise. Thus, they may require stronger cash flow or financials than flagged or branded properties.
Branded Full-Service Hotels: Larger hotel brands, such as Radisson, Hilton, Hilton Embassy Suites, Holiday Inn, and Best Western are often the easiest hospitality properties to finance using CMBS due to their larger size and well-known brand imprint. These assets often combine hotel rooms with retail and office space, which can technically make them mixed-use assets in the eyes of lenders.
Flagged Hotels and Motels: Super 8, Red Roof Inn, and Motel 6 are strong examples of limited-service hotel and motel franchises, which can also often be funded with CMBS.
High-End Hotels and Resorts: CMBS financing can also be a great option for luxury hotels and resorts, however, having strong property financials and cash flow are particularly important for these assets due to the high upkeep costs for these types of properties. As with other hotel property types, name-brand properties such as Ritz Carlton or Conrad hotels are generally easier to finance than boutique properties.
Prospective Terms for CMBS Hotel Loans
CMBS loans often provide the lowest rates and longest terms available for hotel owners and operators on the market today and are often the only type of non-recourse financing available for hotel and hospitality properties.
General CMBS loan terms for hospitality properties include:
Loan Size: $2 million minimum, no maximum loan amount
Loan Terms:
5, 7, or 10-year fixed-rate financing options.
Floating-rate financing may also be available, often at a slightly reduced rate.
Full-term or partial-term interest-only (I/O) loans are often available for well-qualified applicants, though these loans may offer lower leverage and have stricter debt service coverage requirements.
LTV/DSCR:
Non-flagged/unbranded properties: 70% maximum LTV/1.50x DSCR
Flagged/branded properties: 75% maximum LTV/1.40x DSCR
Amortizations: 25-30 years
Prepayment Penalties: Defeasance or yield maintenance
Recourse: Hon-recourse with typical bad-boy carveouts
Eligible Properties:
Brands: Unflagged (non-branded) and flagged (branded) assets are eligible.
Hotel Management: Hotel management needs to be highly experienced, and should have managed (or currently be managing) multiple similar properties. Most conduit lenders prefer external management companies, and might not lend to a property self-managed by the borrower.
Location: Hotels located in areas nearby tourist attractions, such as popular beaches or theme parks, as well as assets located in major cities are often the easiest to finance.
Property Financials: Strong historical cash flow is essential, particularly during low seasons. 3 years of audited financials are typically required for underwriting.
Loan Pricing: Generally based on LTV and DSCR
Non-flagged/unbranded properties: Typically start at 180 bps over U.S. Treasury rates
Flagged/branded properties: Typically start at 150 bps over U.S. Treasury rates
Loan Assumption:
CMBS loans are typically fully assumable with servicer approval and a 1% fee.
The new borrower must have similar qualifications to the previous borrower, including utilizing a quality management company. Like the original borrower, they generally also need to have 25% net worth of the entire unpaid principal balance (UPB) of the loan (excluding their primary residence) and 5-10% liquidity.
Third-Party Reports/Documentation:
Full Property Appraisal
Phase I Environmental Assessment
ALTA Land Survey
Project Capital Needs Assessment (PCNA)