While paying for a property improvement plan or conversion out of pocket is one option, it may not be the best one for every hotel. When out-of-pocket funds are used, it leaves less room to invest your cash in other areas. Additionally, if the hotel has a recourse loan, you have to continue to guarantee that loan.
Another option for funding PIPs or conversions comes in the way of a bridge loan, which offers a way to fund via an interest-only loan. This type of loan can lower the debt service requirement and the money that gets paid to the lender. It buys you time to reposition or reflag a property and ramp up under the new brand to leverage higher cash flow and stabilize your position, according to Mac Dobson, senior vice president, originations, Aries/Conlon Capital, speaking during a recent webinar hosted by the Asian American Hotel Owners Association.
Bridge loans offer other advantages, he said. These loans can remove the risk of recourse because only the property is needed to satisfy the loan. Additionally, if the construction loan is an Small Business Administration 504 loan, a nonconventional bridge loan can be the key to exit after receiving a certificate of occupancy and before entering into an SBA B-Note. Bridge loans can also help to avoid prepayment penalties on a long-term SBA B-Note that has personal guarantees, and they free up SBA capacity and contingent liability from personal guarantees so that you can borrow again.
Bridge loans are not without their disadvantages, however, Dobson said. They do often have higher interest rates that can range from London interbank-offered rates plus 400 to LIBOR plus 750. They also are only available for certain markets, flags and loan amounts (generally $7 million and up).
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“You will want to refinance your bridge loan on the back end, too, so you will pay some redundant closing costs,” Dobson added. “Then, you will have to do it again when you go to a permanent loan.”
Because they are lending based on the owner’s cash-flow projections, nonrecourse bridge lenders focus almost exclusively on the property, Dobson said. That said, the rates and terms reflect the risk lenders are willing to take based on the hotel’s location, flag and the amount of construction required.
“Lenders may not lend to hotels in less desirable markets or lower on the chain scale that don’t have the same level of corporate muscle and reservation systems supporting them,” Dobson said.
Also, in exchange for taking on the risk of an unproven property and not requiring personal guarantees, lenders will often charge 1 percent of the loan amount as an origination fee at closing.
A Willingness to Lend
Another advantage to bridge loans is that many come in the form of commercial mortgage-backed securities from Wall Street or other conduit lenders and nonbank private equity debt funds that are primarily focused on long-term permanent loans, Dobson said.
“The nice thing for hoteliers is that there’s far from a monopoly in this world,” he said. “Lots of lenders are out making these loans, and there’s lots of competition. When you’re in the lending business at a bank, you’ve got to feed your pipeline and make sure loans are available to perform internally.”
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Many lenders will feed their pipelines with properties of strong sponsors that have good brands in good markets and that show potential for positive cash flow after a few years, Dobson said. Lenders tend to offer competitively priced, nonrecourse loans with a two- to five-year floating rate to get the property over the initial hump, then take it out with a nonrecourse 10-year fixed-rate loan later. Dobson said it’s important to note that these loans are not guaranteed. Additionally, lenders will often waive the 1-percent exit fee if you refinance to permanent debt with the same lender.
“I want people to understand that there’s no guarantee you will go to a permanent loan,” Dobson said. “There’s another review that happens first.”