Renovations are a necessary evil for hoteliers. There are many reasons why renovations are necessary for staying competitive in an increasingly tough industry. Part of a successful renovation is finding the hotel financing solutions that work best for you. It’s important to understand your options and choose the best financing type based on your property’s specific needs. In this article, we’ll discuss hotel renovations and finding hotel loans for these projects.
Hotel Financing Options for Refurbishments and Renovations
Financing hotel renovations is essential for most properties. This helps ensure you have plenty of cash flow for day to day operations while still getting the updates you need for success. The key is to find loans that fit your needs for rates, terms, and loan amounts.
Many hotels use bridge loans to fund renovations and property improvement plans. Hotel bridge lending offers shorter terms. Typically, hotels pay off the loan quickly (within two to five years) or replace it with longer term financing.
Mezzanine loans are similar to bridge loans in that they typically offer shorter term financing. Generally, terms match the senior loan. Unlike bridge loans, mezzanine loans aren’t backed by collateral, but allow lenders to convert to equity in case of non-payment.
Preferred equity hotel financing is another common loan option for hotel renovations. These loans can offer extremely high LTV and LTC, even up to 95%. This is an alternative financing option to traditional loans. Lenders consider the capital an equity investment. Hotel profits then pay back this investment, plus a preferred return set between the lender and borrower.
PACE loans are another option you may be able to leverage for your hotel renovation. These are property assessed clean energy loans, which provide long-term, low-cost financing for certain qualified projects. For instance, upgrading HVAC systems and lighting throughout your hotel may reduce overall energy use, which may qualify part of your project for PACE financing.
Why Renovate Your Hotel?
Renovations disrupt operations and often cost a fortune, but they are necessary for keeping your hotel successful. Aging, outdated hotels typically suffer lower occupancy rates and, by extension, declining revenue. If you’re dealing with low room occupancy even during a strong economy where everyone else seems quite full of guests, you might be overdue for a renovation to your hotel.
Most hotel owners proactively plan for renovations to prevent negative effects of running an outdated hotel. Of course, there are no hard and fast rules, but most hotels make updates every five years or so. Typically, hotels go through a soft renovation every five to seven years where they replace bedspreads, furniture, drapes, and similar items. Every 15 years or so, most hotels go through a basic renovation where contractors update bathrooms and replace finishes like carpets and wall coverings. Total renovations take place much later and involve total building rehabilitation, such as upgrading building exteriors and mechanical systems. Doing this on a regular schedule can help you maintain a competitive advantage in your market.
Stonehill – Your Direct Lender for Hotel Loans
Since closing our first deal in 2014, our team at Stonehill has completed hundreds of transactions. We are a direct hotel lender with years of experience finding creative financing solutions tailored to each borrower’s needs. Our team helps fund a wide range of projects, including acquisitions, renovations, and recapitalizations. No matter your hotel financing needs, we have options that suit you. Get in touch with our team today to discuss your funding needs.