The 2007 Hotel Investment Conference brought excitement to the Hospitality Industry never before experienced in prior years. The topics of focus included technology, finance, historic trends and expert predictions on the future of this burgeoning industry.
Listening to the featured panel speakers and attending each breakout session, I couldn’t help but pick up on an underlying theme: “Finance.” I heard the refrain repeatedly, “How can we get the Hoteliers/Moteliers of tomorrow financed in today’s market?” We have seen a huge influx of capital through various avenues, but the most important capital is that which allows “new blood” into the hospitality arena. The owners of tomorrow will help support the industry through the fluctuating trends that all markets experience. The hotel/motel industry must develop a strong foundation if it’s going to withstand the uncertainties of future economics.
There is limited capital available for new hoteliers looking to finance the acquisition of their first or second property and even less capital to finance the construction of a new property. The traditional avenues have included: investors; relatives; former operating partners (for instance, when GMs acquire the property they are currently operating from their owner); and older SBA programs, such as the 7(a).
These methods have served a purpose in the past and still do now, but we do not all have a rich uncle willing to take a chance on us in one of the most competitive industries in the United States. If you are a smart business owner purchasing your first, second, or even third hotel/motel property, it would be very wise to start with a 504 loan. Once you’ve outgrown your 504 eligibility and have two or three hotels operating successfully, you can begin to secure ordinary conventional bank financing more easily for your next several projects. The 504 loan program essentially levels the playing field — borrowers can obtain higher LTV’s and below market, long-term, fixed interest rate financing. The 504 loan is the most under-utilized avenue for success in the hospitality world.
Here is what I know to be true: first time owners receive up to 85% loan-to-cost financing through the 504 loan program. Borrowers get the highest cash-on-cash return financing available in the marketplace. This leaves more of their hard-earned cash to redeploy elsewhere at a higher ROI. And, nearly half of the total loan amount with a 504 loan is the least expensive financing available in the commercial mortgage industry for small to mid-sized businesses (averaging about 150 basis points less than market pricing from ordinary bankers with these lower rates fixed for 20 years). There simply isn’t anything else that could possibly compare to this type of financing instrument. Yet, it remains relatively overlooked.
The events at this year’s convention gave us a renewed focus of where this industry has been, where it is today, and where hospitality is heading in the future. The 504 loan program allows the industry an opportunity to attract the right type of operators to lead the industry into that future. Let’s not allow this loan program to remain the “Best Kept Secret” in the hospitality business anymore.
– Adam T. Wonus
Mercantile Commercial Capital, LLC
Loan Acquisition Officer