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Hotel Financing News

January 23, 2014


Economic Expectations for 2014


By paying attention to the historical financial news, one may draw the following general expectations for 2014:


Expected Status of Major Hotel Loan Programs


More specifically on the hotel financing, we will continue to see revenues increase year over year. Discounting factors such as regional economy, brand, management, and other specific factors such as hotels in the stabilization phase, taking a simple non-scientific approach on a sample of our clients' hotels nationwide show an 8.8% increase in gross revenue year over year for the 2013. The credit availability is not seeming to improve significantly in 2014. The following is a brief on the expected status of each hotel loan program:

CMBS Conduit (non-recourse)
The underwriting criteria is remaining the same with LTV of 65% to 70% and Debt Yield of 10.5 to 12. This means the Mezzanine loans with the rates in the teens with multiple points can make projects with LTVs of over 70% under this program fairly unattractive. The CMBS originators are however eager for new loans and are showing appetitie for hotels. With average spread of 2.5 to 2.75% over SWAP rate, as of the date of the writing of this review, the average 10 year fixed rates are at about 5.5%.  Read more on these loans...

Life Company
Similar to CMBS loans, the underwriting criteria and the terms of these loans have not changed dramatically and are fairly similar to the CMBS loans. Lower prepay and better customer service are the selling points but as opposed to the CMBS loans, these loans require personal guarantee of the sponsors.

Conventional
There is visible appetite by the commercial regional/local banks in hotel loans. The focus is still is on the lower Loan to Value (LTV) transactions of 65% to 70%. With the secondary market still unavailable for the non-SBA hotel loans, there is less interest in larger than five million hotel loans. The national non-depository lenders are still not a player in our industry. The rates for the conventional hotel loans vary from 5% to 6+% depending on the lender, the market, and the lender’s cost of funds.

SBA 7a
Continues to be the program to use for the loans of up to 5 million for higher LTV and for more challenging hotel loans. Some national lenders are saturated on the hotel assets but fortunately new players are coming to the market. Downside is that the increase in the SBA limit to 5 million has resulted in a significant upswing in the volume of these loans, hence the fraud and the abuse and naturally the mushrooming of the regulations making the SBA loans challenging for hotel investors with multiple partners and complex ownership structures who are taking advantage of the availability of these hotel loans.  The hotel rates are generally averaging about 5.5%.  

SBA 504
Probably the most cumbersome financing program to handle with fewer lending sources for the bank portion of the loan yet still more available to arrange than the conventional program. In fact the lenders prefer to use this program for hotels as it keeps the lender at 50% LTV in the first position. The rates of the 2nd loan by the SBA is issued by the SBA on monthly basis and is set across the nation and is fixed for 20 years with a 20 year amortization. The first loan however has rates that are varying depending on the lender and the market and range from 5% to over 7%. The refinance program has not been approved by the Congress yet and so the 504 can only be applied to the acquisitons.

Construction
More availability of hotel constructions in most markets. The sources may be national lenders if government loans such as the SBA or the USDA are used but most likely regional or local lenders for the conventional program. The key is the experience, the global cash flow, and the liquidity of the sponsors.

USDA
As usual under funded and tough to obtain with regional USDA offices of some states offering lower LTV of 70% for hotels. Generally the state level funds run out very quickly and dealing with the national level funds has so many job creation requirements that make it unattractive for hotels that have limited employment capacity.


for further questions and discussions, please reach Ramin Mostaan at (949) 477 5000 or ramin@scicap.com




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