Create a roadmap for your financing goals


How to use a non-recourse, non-conventional bridge loan to pave the path to fixed-rate, permanent financing.


Just as you draw up blueprints to build or renovate a hotel, you also need a roadmap for your property’s short and long-term financing. Conventional sources, such as a local bank, are the usual route for a construction loan. When your hotel is ready for business, however, the door to attractive short-term options that remove the risk of personal guaranties, give you an out before your construction loan starts to amortize and buy you time to ramp up, also opens.

Wall Street, other conduit lenders and non-bank private equity debt funds are also looking ahead. Primarily focused on long-term permanent debt, most of these lenders feed their pipeline with properties of strong sponsors, with good brands in good markets, that show the potential for favorable cashflow after a few years’ seasoning. For certain loan amounts (typically $7 million and higher), lenders will offer a competitively-priced, non-recourse, two- to five-year floating rate bridge loan to get the property over the hump, then take it out with a non-recourse 10-year fixed rate loan later. They often waive their 1 percent exit fee if the borrower refinances to permanent debt with the same lender.

Non-conventional bridge loans aren’t just for newly-constructed hotels. The interim funds can be used to finance activities that will deliver future value, such as re-flagging or renovating your property, or acquiring and improving another hotel. The bridge loan affords you time to execute your business plan, add value and stabilize your property, so you can cash out once it is eligible for permanent debt. And if your construction loan is an SBA (504) loan, a non-conventional bridge loan can be your ticket out after receiving your Certificate of Occupancy and before entering in to a SBA B-Note through your local Certified Development Companies (CDC). This can potentially save you from locking yourself into paying pre-payment penalties on the long-term SBA B-Note with personal guarantees. This frees up your SBA capacity and contingent liability from personal guaranties so you can do it all over again.

If a hotel has insufficient cash flow to cover the bridge loan payments and other operating expenses immediately, an intermediary will negotiate with the lender to fund interest reserves to manage the shortfall, as well as working capital reserves for marketing and salary expenses. The reserves are funded at closing as part of the loan amount and are released to the borrower through a disciplined budgeting and reporting process.

Non-recourse bridge lenders focus almost exclusively on the property because they lend on the owner’s cash flow projections. Their rates and terms reflect the risk they are willing to take based on the hotel’s location, flag, and the amount of construction required to execute the business plan. While top brands in good markets are rewarded, lenders may not lend to hotels in less desirable markets or lower on the chain scale that don’t have the same level of corporate muscle and reservation systems supporting them. At one point in time, we were seeing hotel bridge loan rates from one-month LIBOR + 400 basis points for Marriott and Hilton hotels in a primary market, to LIBOR + 750 basis points for a Best Western in Detroit, as well as everything in between. (LIBOR, or the London Interbank Offered Rate, is the benchmark rate that the world’s leading banks charge each other for short-term loans.) In exchange for taking on the risk of an unproven property and not requiring personal guaranties, most bridge lenders charge 1 percent of the loan amount as an origination fee at closing.

Because CMBS financing hinges on current market conditions, and your property’s future ability to generate enough income to cover any debt service is unknown, qualifying for long-term debt when the bridge loan matures is not guaranteed. CMBS conduit lenders, however, want to have a steady stream of deals in their pipeline to meet investor demand. As a result, lenders diligently vet each property and only award bridge loans to hotels they believe will be successful when it’s time to transition to permanent debt. In addition, your lender will stay updated on the property’s progress through ongoing required profit and loss reporting. Some debt funds in the marketplace don’t have a fixed rate program, but will underwrite the deal to ensure that it will work for a fixed rate permanent loan once stabilized. An experienced intermediary will know how to demonstrate the property’s future potential to the lender at the time of the bridge loan and again when ready for permanent debt, in order to secure the most favorable terms for your hotel. ■

Rushi Shah is CEO at Conlon Capital, a commercial mortgage banking firm formed by a merger with Aries Capital, which specializes in CMBS and other non-recourse lending solutions. Over the past 26 years, the Conlon and Aries teams have collectively funded more than $8B for hotel, multifamily and other commercial properties. Shah held previous positions at Northern Trust and is a member of AAHOA’s Founding & Allied Member Committee. Shah holds an MBA from The University of Chicago’s Booth School of Business.


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