Excessive returns are achieved by real estate investors on their money by taking benefit of the security of the underlying asset to finance their business’s deals with other people’s money (OPM). It is the debt and equity comprised in the capital stack, each with a few varietals. Hotel loans, nowadays, are widely accessible across different types of lenders.
Regarding the hotel financing basics, leverage is bountiful, allowing the hotel investors to reap great rewards by using OPM. Lenders tend to be more cautious and exercise greater diligence when striving to invest in hotels. This article is all about the basics of hotel loans.
Hotel debt basics
Hotel loans are fitted in the safe and lower end of the capital stack. It is the lien right that secures the property upon default, and different factors are there that determine the pricing. Here mentioned are the factors influencing the pricing of the hotel loan:
Total capitalization is referred to as the amount of money required to execute a particular business plan. Every capital provider in the deal has different rights and responsibilities, which further determines their position in the capital stack. When talking about the hotel financing basics, one of the two positions is taken by the hotel loans- senior and mezzanine.
The senior position is the lowest tranche of the capital stack and is also the safest position with the lowest return. On the other hand, mezzanine debts are riskier and allow for greater returns.
Three major components are included in the hotel debt pricing, and these are interest rate, amortization, and maturity.
The interest rate can be fixed or floating. A fixed interest rate is one that remains the same for the loan’s entire life. Alternatively, a floating rate is adjusted periodically based on the spread over the index rate. Amortization is defined as a reduction of a debt over a given duration. And maturity is referred to as the date when the last payment on the hotel loan and total outstanding balance is due to the lender.
It is the deal specifics, the value of the property, and cash flow that determines the amount a lender will finance to the hotel owner. Both subjective and objective measurements are accounted for when it comes to judgment on deal specifics. The major factors here are the deal sponsor’s experience, market-related risks, and the composition of equity investors. The value of the hotel’s property is significant in benchmarking the lender’s total exposure.
Today’s lenders are much more diverse and sophisticated than traditional ones. It is the availability of data in abundance, specialization, and hyper-connectivity that has paved the way to the competitive and globally-oriented hotel debt landscape. Now that the market for hotel loans is vast, it is essential for the owner to understand the hotel financing basics. Knowing about the listed determinants affecting the hotel loan pricing can help the owner avail of the finance at the best possible price.