Get approved for your next hotel construction loan.

The last two years in the hotel industry has been a period of tremendous performance.  Occupancy is up, ADR is up, RevPAR is up.  In addition, although labor costs have been on the rise, raw building costs have only increased slightly in most markets.

Despite all of these statistics, many hotel developers are still struggling to secure traditional financing for their new project.  Many lenders are still being selective and limiting lending to only the healthiest hotel developers.  So if you are a hotel developer without deep pockets, what can you do to improve your chances of getting approved for a new construction loan?     

One option I’ve heard several lenders discuss is removing all FF&E expenses out of the main construction loan.  On a typical, new, 100 key franchise hotel, these costs can be in the range of $1M-$2M.  There are several main benefits to doing this:

  1. Increased Borrowing Capacity – Having separate lenders for FF&E and the main construction loan typically means you will be able to secure greater amounts of overall financing requiring less money down.

  2. Lowered Risk For Lender – Most lenders will only offer a 60% LTC which requires owners put down 40%. By removing $1M+ in FF&E from the construction loan, the capital commitment for the construction lender is reduced and spread out more evenly between the FF&E lender and the developer. 

  3. Improved Credibility With Lender – Given the lower capital commitment, securing lending for FF&E is typically easier than a full construction loan. If a construction loan application is submitted with documentation of prior approval for FF&E financing, the lender is likely to take into account that another lender has already reviewed the deal and considered it sound.     

With interest rates still low and industry projections strong through 2016, now seems like as good of time as any to move forward with your next hotel development.  Hopefully this strategy can assist in securing the necessary financing to get your next project in the ground!  

 

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