We are seeing new hotel projects get approved. We are seeing new hotel projects get rejected. For us mortgage brokers, the new hotel pipeline is gaining steam amongst hotel developers with favorable projects that have feasibility studies backing the projects’ financials. These well-planned proposed franchise properties are able to answer the questions that lenders are asking: Does the property and franchise make sense for the area? Will the strength of the developer overcome any potential obstacles in the project? Will the project meet the debt service coverage ratio within the required timeframe? Time and again the lenders will be interested in a project only to turn it down after the feasibility study comes back with weaker than expected numbers. But these projects can be salvaged with the right preparation and sometimes even a little negotiating with the right people.
Developers are also having to deal with several roadblocks to seeing their project completed. Construction costs have risen over the past two years, with project costs even increasing during the course of development. The Small Business Administration (SBA) has pulled back from lending on new hotel construction in certain areas, limiting the availability of funds for new hotel construction. Developers are also competing with other developers as to which loans will get approved before banking portfolios get maxed out with certain property types.
With all of these obstacles, it is important to surround yourself with a good team; an experienced designer and architect, a contractor that has built similar properties, an operations team that can address both the market demand and hotel operations once running, and finally a financing team that steer the project to the right lender and loan product.
For the best outcome, developers should look for a mortgage broker that has a network of lenders able to finance hospitality projects and a financing team that has experience with hotel development, operators and owners. At Hallmark Funding Corporation, we have helped usher projects through by simply reviewing plans, introducing developers to the right contractor, finding ways to cut costs and expenses that the architect and contractor might have missed, even going so far as to have the franchise representative provide different hotel brands within the franchise umbrella.
Going beyond a good team, mortgage brokers primary function is to match a borrower with the right lender, especially now that the Small Business Administration funds have gotten harder to secure for new projects. The mortgage broker is able to step in with the right funding source for the project and increase a borrower’s strength through preparing them to be meet a lender’s expectations and requirements.
Different banks have different appetites for property types, some willing to lend on startups with a conventional loan up to 70% Loan-to-Cost if the debt service coverage ratio meets the projections. Other products are also available for different types of projects, depending on the lender and its footprint in the industry. Fortunately, the SBA isn’t the only government agency able to assist in financing as some of our rural clients have found out utilizing the United States Department of Agriculture’s Business and Industry loan program for qualified projects.
As the days of easy money fade away and more developers are competing over the same source of funds, it is important for developers to make themselves a good borrower. Lenders are going to take a look at both the project and its economics as well as taking a hard look at the borrower. With this fact in mind, borrowers need to make sure that they have their financials in order, including tax returns, for submittal to underwriting in a timely manner. Financial statements within 60–90 days old are required for all affiliate entities that a borrower has a 20% or greater ownership stake. This requirement can be quite a task for ownership groups comprised of multiple members with several businesses each. Your strength as a borrower can help to overcome some of the potential development hurdles inherent in new projects.
We are seeing projects getting done. The ones that are getting financing are the ones that have borrowers that have played their projects positive attributes to their strength as business owners and developers, with some help from a qualified team, and their mortgage broker.
Hallmark Funding Corporation is a commercial mortgage broker that has specialized in the hospitality industry for the past 20+ years. Our ability to arrange financing for all types of hospitality loans including purchase, refinance, construction and remodeling using many types of loan structures has led us to have clients nationwide while being based in the Sacramento area. Visit our website, www.hallmarkcorp.com for more information. CADRE# 01257730
