Hotel Loans - Now in the Credit Crisis

Where do you start? Hotel loans whether for purchase or refinance have taken a firm beating in this credit crisis. Basically, there are now only a few options on hotel loans. Probably 90% of all conventional hotel loan programs are gone. Deals over $3,000,000 are taking the worst of it, flagged or unflagged, conventional or nonconventional.

As many readers are aware, the issues on the commercial secondary market is the immediate cause of this mess. Very few banks are willing to portfolio hotel loans and instead are used to funding and selling the hotel debt off into the secondary market. Now since there are very few buyers, banks have to either pass on the deal or fund it and hold onto the loan in their balance sheet for the long term.

Most banks would rather portfolio more general purpose properties like office or retail before they'd consider hotels. So deals that banks where willing to underwrite and fund just a few months ago, they are now backing away from in fear that there won't be in buyers of the hotel loan.

Fixed rates on hotels are virtually gone. The vast majority of all hotel loans are now quarterly adjustable, based off of Prime. The typical margin is 2% - 2.75% over. Prime is now at 4% so most borrowers are looking at an effective rate of 6% - 6.75%. Ironically these are some of the best rates we seen in long time. But of course borrowers have to live with adjustable rates, and for some borrowers this is hard to do. Many don't care (that much) and or recognize that this is the only option.

Debt coverage ratios have in general become more conservative (no surprise here) to a minimum 1.35. Some banks want to see ratio's closer to a 1.4 -1.5 on conventional loans. Which basically means that the funding banks are "cherry picking". It also means that the loan to value will be very strong, most likely lower than 50% because the two ratios are tied together.

All in all, SBA loans rule the day with hotel financing. Again borrowers should be thinking about loan amount less than $3,000,000 to have more options. And on a positive note, despite all the carnage, borrowers are getting great rates, and high levels of financing through these government sponsored programs, like up to 85% on purchases and 80% on refinances. As always, the trick here is finding the banks that are actually funding deals with the government programs. Just as with conventional loan most banks that used to do SBA loans are "on hold" until the market returns.