Nonrecourse hotel loans entail less risk, more benefits

Lenders provide many options for financing in the hotel industry, but finding the right debt for an asset can sometimes be a daunting experience, especially if hoteliers aren’t aware of the alternatives.

While traditional recourse loans are an option for financing, Mac Dobson, SVP of originations for Aries/Conlon Capital, said they aren’t without their limitations. For instance, the borrower must personally guarantee the loan, which means both personal wealth and the property are on the hook if there is a default. Then, if there is a foreclosure with a shortfall after the sale, the borrower is on the hook for that amount.

“There’s a time and place for this loan, but we find the hotel community is not aware it can go out and get nonrecourse loans,” Dobson said.

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Commercial mortgage-backed securities are combined and sold on the secondary market, and because lenders face less risk, they are willing to offer these nonrecourse loans, he said. Here, only the property is at risk if the borrower defaults, unless there is fraud.

“What that means is that a bank or finance company has a team of CMBS lenders. They will go out and book a loan on a balance sheet and they will sell the loan after it closes. A bond sale funds loans on the back end,” Dobson said. “Because of way it’s structured, the risk of the loan is passed on to a variety of different parties.”

Nonrecourse loans can set free a hotelier’s borrowing capacity, he said. For example, these loans can:

  • offer a clean personal balance sheet that leaves room for other refinancing and acquisition financing opportunities and can make borrowers more attractive to lenders;
  • allow lenders to look past previous financial challenges, such as bankruptcy;
  • offer the ability to add mezzanine debt to increase leverage; and
  • provide access to ongoing sources of capital.

“As a hotelier, there’s lots of things you can control. … What you can’t control is brand proliferation in the area and new supply coming online,” Dobson said. “We encourage people to think about protecting yourself and your family against things outside of your control, and these loans achieve that.”

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Nonrecourse loans can be used to avoid the effects of future interest-rate increases from the Fed because they can offer longer fixed-rate terms and amortizations. A 25-year term versus 20 years equals lower payments and increased cash flow, for instance. These loans also protect personal assets from global and domestic economic uncertainty and minimize the impact of new competitors entering the market.

Additionally, bridge loans offer an opportunity to buy time to execute a business plan and can be used for refinancing a construction loan, financing a hotel conversion or be used to purchase a value-add opportunity.

“You can use a bridge loan to reposition a property, then put debt on the asset,” Dobson said.

Nonrecourse loans give hoteliers the ability to take cash out to monetize the value that has been created. When it comes to CMBS loans, there are no restrictions on what the cash is used for, unlike conventional loans that often require that the money is put back into the property. This perk can produce similar benefits to selling a hotel without giving up the asset.

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Additionally, nonrecourse loans help hoteliers to maintain flexibility. If a hotelier decides to sell a property, the loan can usually be assumed by the buyer.

“In the future, that will be an attractive feature across the country because interest rates are expected to go up,” Dobson. “We’ve been in an accommodative low-interest-rate market for a few years. That’s changing slowly but surely.”

These loans will provide a unique opportunity to market the property and loan together, he added.

“This is a way for you to protect yourself and your family,” Dobson said. “We encourage people to go out and seek this nonrecourse debt when they can.”