Loan to Value - What are hotel lenders looking for?

In the mid-2000s, getting hotel financing was usually a piece of cake. Now it’s nowhere near as easy, though it’s getting better as the economy slowly improves.  And banks are keeping loan-to-value ratios tight; back in the day, where you could secure a 75 percent LTV loan or higher when things were blowin’ and goin’ today you’d expect to see leverage in the 65% range for conventional structures and 70-75% for non-conventional structures.

And to do that, you’ll have to do due diligence on your property and you’ll have to have a plan. Remember, hotels are different from other real estate because they’re really operating businesses – and unlike other forms of real estate, they have to lease up every day to maintain cash flow.

The value of a hotel is determined by its performance, which directly affects its NOI or cash flow. Lenders look at how the hotel, if it’s branded, is performing, its location, the flag it’s flying, how long the license has left to run, the condition of the property, the barriers to entry. And don’t overlook that all-important property improvement plan; a hotel without a PIP and an accurate PIP budget set-aside, and/or one that badly needs an upgrade, is saddled with something lenders would hardly consider an asset.

Lenders are also going to look at LTV constraints. Say there’s an existing asset and they’re doing a refinance and will only go up to 75 percent LTV. The lender’s going to have an expert appraise the property and the appraiser is going to apply a market cap rate to that NOI and that’s going to provide a value. That valuation is what the lender’s going to lend against.

-Greg Morris