Low cost, long-term hotel financing is valuable for many situations. Permanent loans can help offer these benefits for hotel owners with an already successful property. Permanent financing isn’t for everyone, so it’s important to understand the advantages and disadvantages associated with these loan types.
What is Permanent Hotel Financing?
First, what are permanent hotel loans? This type of financing is most often used for acquisitions, expansions, or refinancing for stable properties. However, our experts do consider other situations. Typically, we recommend this type of financing for premium-brand hotels with solid cash flow.
While they are named “permanent loans,” they are actually a form of long-term financing. Permanent hotel financing generally offers terms of 5, 7, or 10 years, with amortization between 20 and 30 years. Therefore it can help give you capital for long-term investments, such as expanding a chain hotel.
Qualifying for a permanent loan means having an existing hospitality property. This is because it’s a form of non-recourse debt with the hotel serving as collateral for the loan. Many hoteliers use permanent financing to access equity capital for further investments. However, permanent hotel financing isn’t for every property, and there are pros and cons to these types of loans.
Pros and Cons to Permanent Hotel Loans
Permanent hotel financing offers many advantages compared to many other types of loans. One of the main benefits is that it offers some of the lowest interest rates, often fixed between 4.5% and 6.5%. This makes it an attractive financing option. Also, because they offer longer amortization periods, payments are smaller. Also, these loans are non-recourse, which means any other assets are safe in case you default on the loan.
However, these major benefits do come with some disadvantages. Because permanent loans put most of the risk on the lender, the qualification is often quite rigorous. Therefore, generally hotel lending professionals require at least one or more years of positive NOI from your property to provide permanent loans. Stability is the name of the game when it comes to looking at permanent financing.
In addition, permanent loans also often include prepayment penalties and lock out periods. Therefore, it’s important to keep this in mind as you explore your financing options. These factors can make it difficult to sell the property until the end of the agreed upon time period.
If a permanent loan doesn’t fit your situation, there are many other types of hotel financing available, such as bridge and mezzanine loans. Working with experienced lending professionals can help you find the right solutions for your needs.
Customized Hotel Lending Options at STONEHILL
If you’re ready to grow your hospitality company, our team at STONEHILL is here to help provide you with the financing you need for success. As a direct hospitality lender, we work with you to customize loan structures and terms to suit your circumstances. Contact us today to learn more and discuss your options with our lending experts.