There are many types of hotel loans to choose from for your property. The type you choose depends on many factors, like why you need the financing and your current capital stack. One popular type of hotel loan is mezzanine financing, which offers some unique characteristics that may be great for your hotel. In this article, we’ll explain what mezzanine loans are and when to use them for your hotel business.
What are Mezzanine Hotel Loans?
Mezzanine hotel loans are a type of financing that is a hybrid of debt and equity. Generally, these loans are a lower-cost alternative to equity financing because it combines both debt and equity. Essentially, with these hotel loans, the lender provides a certain amount of debt and owns a certain amount of equity to make up for the amount loaned. In the case of default, the lender can usually convert the debt to equity after senior lenders are paid. Mezzanine financing is incredibly popular in the hospitality industry.
Here are some key details about mezzanine hotel financing from Stonehill:
- Loan amounts $2 million to $20 million
- Rates starting at 14%
- Amortization matched to senior debt
- Loan to value up to 75%
- Loan to cost up to 75%
- Loan fees 1% to 2%
Mezzanine financing tends to be longer-term and does not require any collateral. However, it’s also important to keep in mind that it comes with higher interest rates than many other types of loans.
When to Use Mezzanine Hotel Financing?
So, when might your hotel use mezzanine financing? There are many situations where you might need mezzanine hotel loans. These are usually used for growth projects or acquisitions. The risk in these projects tend to be quite high, so many conventional loans simply wouldn’t be enough to cover the total costs of the project.
Rather than raise equity, which can be incredibly expensive, mezzanine financing offers a lower-cost alternative to fund growth projects and acquisitions. It’s also a good option when you’re trying to maintain a certain capital stack and keep debt within a certain range for your hotel.
Common situations where you might consider mezzanine financing include:
- Acquisitions
- Recapitalizations
- Construction takeout
- Renovations
- Property improvement plans
- Conversions
- Gap financing
It’s common to use mezzanine financing when you need a certain amount of capital, but cannot get it through a traditional loan because of your creditworthiness or lack of assets as collateral for the loan. If this happens and owners cannot provide a capital injection or raise more equity, then mezzanine financing can be an ideal option.
Hospitality Financing Solutions from Stonehill
When you need financing solutions for your hotel, contact our team at Stonehill. We are a direct hospitality lender specializing in creative financing solutions for your projects and ventures. Our team offers a wide range of financing options, including mezzanine financing and hotel bridge lending to suit your requirements. Contact us today to discuss your financing needs with our experts.