Bridge Financing Loans Are Here to Fill the Gap in Financing in San Diego
Hotel bridge loans are typically short-term loans that a group of hotel owners takes out to fill the gap in financing needed for construction, acquisition, and other related investments. The most common bridge loan size is to provide funds for developing or acquiring a hotel property. Bridge loans are also sometimes used as financial safety nets during periods of slow cash flow and while waiting on another lender to close on their financing.
How to Get Hotel Bridge Loans
Hotel construction loans are a great way for an owner to finance the purchase of a building. Construction loan programs are taken out by a group of individuals who own businesses to buy a piece of property and set up the business goal. Most commonly, construction loans are used for hotel purchases and hotel renovations.
However, occasionally construction loans are used to purchase additional land to expand the business. Either way, they are straightforward to get when it comes to financing options.
Hotel loans are a great way for business owners to finance the purchase of property and/or financing. This loan is used for various reasons, one being to finance the purchase of a new hotel. Hotel loans are also great when remodeling a hotel by adding rooms, changing the number of beds, or even opening up new restaurants in the hotel that are not present at this time.
Hotel loans are easier to obtain because all you need is good credit and an amortization plan in place. In addition, hotel loans do not require collateral except under unusual circumstances. A point will be deducted from your credit for those who have bad credit or little credit history attached to their name.
A mezzanine loan is a form of bank financing similar to a bridge loan, but the original loan has only a short term of three years. Mezzanine loans are intended to be used as collateral security for longer-term financings at lower interest rates.
Under these circumstances, more than one lender will provide their shares of the needed amount of financing. Mezzanine loans are often structured as a bridge loan and may be structured to match a bridge loan by having shorter terms and lower interest or to be an entirely separate type.
What Is The Difference Between A Commercial Mortgage And A Hotel Bridge Loan?
A commercial mortgage is a form of financing designed to buy a building or real estate property. In other words, it’s what you use when you are purchasing a hotel property. The interest rate (fixed or variable) is usually calculated as a percentage of the original loan amount, and the repayment term is flexible.
On the other hand, a hotel bridge loan is short-term financing that a group of hotel owners takes out to fill the gap in financing needed for construction, acquisition, and other related investments. The most common bridge loan is to provide funds for developing or acquiring a hotel property. Bridge loans are also sometimes used as financial safety nets during periods of slow cash flow and while waiting on another lender to close on their financing.
The Benefits of a Bridge Loan for Hotels
The advantages of financing hotels with bridge loans are many.
A hotel bridge loan makes it easy for owners and investors to get their investment in the hotel approved. They need to show that they have substantial access to the capital resources investment business plan and that the bridge loan will not interfere with current monthly debt payments.
A hotel bridge loan can also take out bank financing or other forms of high-interest financing, which can often be difficult to get approved.
Hotel partnerships can secure a bridge loan without having to obtain bank financing or expensive high-interest financing.
A bridge loan provider will typically fund the loan within a week or two, allowing investors to get started on their investment quickly.
Another advantage of hotel bridge loans for hotel owners and investors is that they can take it out without a large down payment. Many individuals have a lot of cash on hand but aren’t in a financial position to make a large lump-sum investment and often find that they have to put a substantial down payment on the property just to get approved for financing.
The most common type of hotel bridge loan is used by people who buy or build hotels during construction. After the building is completed, people may need to purchase additional equipment, fixtures, furniture, or equipment that they do not receive from the original construction contract.
What Conditions Apply for When a Hotel Can Get a Bridge Loan?
One of the key factors in determining whether a hotel will secure a bridge loan is the current creditworthiness of the owners. Bridge loans are taken out before the closing cost on traditional longer-term financing. As a result, the lender will not have sufficient information to determine creditworthiness if it cannot obtain at least two years of tax returns for the business and its principal owners.
The extension option available to bridge lenders allows them to extend the maturity date of the loan up to six months. This gives the borrower more time to complete the project. However, this option does come with some restrictions.
Since this is often not possible in situations where there is little time to close on a traditional lender, hotel owners must take out bridge loans based on estimates and projections. Typically these financial estimates must be derived from previous tax returns or recent financial statements issued by an accountant or third-party service provider.
How Much Collateral Does the Bank Need to Provide on Behalf of the Hotel?
The collateral for these commercial bridge loans is normally in either the hotel building or some other portion of it. The collateral for the hotel itself is only needed to guarantee the loan itself and not to secure other debts that the hotel operator may owe.
A hotel owner typically makes a construction completion bridge loan request to the bank in stages:
Step One: The financial institution will want to see a copy of the architect’s plans for the finished hotel, the permit or application for it, and other legal documents about it.
Step Two: A copy of each hotel’s owner’s financial statement is needed, along with proof that they own at least 25% of the preferred equity in the property and are therefore deemed eligible to apply for a loan from the bank. They will also need transcripts from their financial institution showing their most recent three months’ worth of transactions, including any deposits made by guests or money received from other sources of income.
Step Three: As part of the loan application, the hotel owner will need to submit proof that the hotel is going to be built and that all expenses are projected in their financial statement.
Step Four: Property taxes will need a copy of the tax bill or receipt for payment to cover these items. Hotel properties are subject to property tax from the county, state, and federal governments. Owners will typically pay these taxes through an annual hotel operating report showing gross income monthly.
Types of Hotel Bridge Financing
The term “bridge loans for hotel financing” is used to describe a variety of financing structures that fall into two basic categories:
Bridge Loans – A short-term loan taken out by a group of hotel owners to fill the gap in financing needed for construction, acquisition, and other related equity investment. The most common bridge loan is to provide funds for developing or acquiring a hotel property. Bridge loans are also sometimes used as financial safety nets during periods of slow cash flow and while waiting on another lender to close on their financing.
Syndicated Loans – individual lenders pay off a syndicated loan originating from one lender. These types of hotel loans are typically structured so that the individual lenders are reimbursed in proportion to the amount of money they have invested in the project.
How Do I Find a Qualified Lender?
A competitive hotel construction loan and bridge hotel lending are sometimes hard to find. A lending business understands that growth and development opportunities arise quickly, so they also understand the need to provide financing quickly. That’s why it’s important to work with a lender with a local presence and access to additional capital sources.
The loan marketplace is very active with lots of competition, with many lenders competing for the best rates, fees, and terms. This is good news for hotel owners who need financing now. However, it can make the bridge loan process of selecting a lender tricky. Be sure you are working with a lender that understands your market and works as quickly as you do.
Customized loan structures are available from lenders with or without the participation of a hotel owner.
What are the Requirements for A Hotel Bridge Loan?
Bridge loans have a significantly shorter lifespan and will require a quick turnaround. A typical hotel bridge loan has a term of 1-2 years. A conventional loan has a much longer time frame of 10 to 15 years. Commercial loans have strict requirements for liquid collateral, creditworthiness, and collateralization.
Creative loan structures can allow owners to take advantage of the short-term loan time frame. There are many other creative capital solutions to using a bridge loan. One disadvantage of a bridge loan is that it will likely take longer to close with all systems required for closing in place.
Non-traditional loan programs do require extra work because there is a need to verify creditworthiness, financial stability, and collateralization, and do not benefit from all systems being in place when a bank closes on the financing originally requested for an existing hotel transaction.
The Effect of Credit Conditions on Hotel Cash Flow
The hotel industry is a cyclical one, with occupancy and rates varying throughout the year. It’s common for hotel properties to operate at a loss during slower periods, such as between January and March (“winter season”) and between July and September (“shoulder season”).
Typically, hotel properties are financed through a combination of debt and equity. The property secures the debt, and investors provide the equity: the lower the debt-to-equity ratio, the less risky the investment.
The ideal financing structure for a hotel acquisition would include a bank loan and an additional loan from private sources (equity investors) with minimal or no participation from the seller. If a buyer has enough cash on hand to cover the amount of money they need to borrow from a lender, then there’s no reason to include seller participation in financing.
Some sellers will not participate in financing because they want to retain future growth opportunities associated with their asset(s).
Doc equity loans are typically used to bridge the gap between two other lenders. A bridge loan provides the initial funding necessary for a capital upgrades purchase or capital for renovation projects. The loan term is usually between six months and three years but can be as short as 30 days.
The financing terms of a hotel loan can vary depending on the lender’s size, product offerings, reputation, and creditworthiness.
A private lender will have strict requirements for creditworthiness and collateralization of any loan they provide. Private lenders will often have higher than average underwriting standards due to their risk assessment process in determining whether to provide the financing required by their borrowers.
Commercial Bridge Loan Risks and Loan Terms
Commercial bridge loan program funding agreements are generally structured as fixed-term loans, with interest and fees charged daily. Often, hotel owners with extensive experience who are short on funds for financing will have their funding delivered in installment bills of at least equal amounts over about two to four months.
The economic downturn caused some banks to reduce their lending activities, which resulted in fewer commercial real estate loans available. As a result, more hotels were forced into defaulting on their loans. This led to increased foreclosures and bankruptcies among hotel owners.
These types of commercial bridge loan structures are preferable to an all-or-nothing type approach that could delay the acquisition or development of a hotel project. For this reason, many hotel developers may choose to obtain their money loans through other financial institutions such as alternative lenders rather than through commercial lenders.
Hotel bridge loans can be a handy tool for hotel developers. However, it is vital to ensure that the right lender is used for the project so that both the lender and borrower will benefit from the relationship.
- Hotel bridge loans provide the initial funding necessary for capital purchase or redevelopment projects
- Bridge loan funding agreements are generally structured as fixed-term loans, with interest and fees charged daily
- Interest rates on a hotel bridge loan transaction will typically be higher than the general financing rates of hotel properties
- Hotel ownership is a cyclical business, with occupancy and rates varying throughout the year.