Are bridge loans the right choice for challenging times?
The types of financing available for hotels are similar to the funding available for other types of commercial real estate – construction loans, permanent loans, mezzanine financing, and bridge loans. The specific type of loan a hotel owner chooses depends on where the asset is in its life cycle as well as the business plan for the asset. Is this a long-term generational hold? A short-term fix up and flip? A medium-term hold to achieve a specified return objective and sell? These answers are crucial in the decision-making process now more than ever. As we emerge from the pandemic and the most challenging environment our industry has ever faced, most hotels are not yet stabilized and many could benefit from the flexibility a bridge loan offers. A bridge loan is a generic term that can take many different forms. It can have a term as short as six months or as long as five years. After a five-year term, most loans are categorized as permanent. Let’s look at three advantages of a bridge loan.
1. MAXIMUM FLEXIBILITY FOR UNCERTAIN TIMES
At the moment, we have COVID moving from pandemic to endemic, inflation at decades-high levels, and a war raging in eastern Europe. These are unique circumstances that warrant careful evaluation when considering financing. By nature, a bridge loan is a short-term loan that allows for maximum flexibility in terms of prepayment and structuring. This structure empowers you to use various financial tools: swapping all or a portion of the loan to a fixed rate for a stated period of time; paying off the loan in whole or in part early; even upsizing the loan if business conditions warrant. Typically, bridge loans are held on the books of lenders and not sold in the capital markets, so the person who makes the loan also can help you make loan modifications. In this uncertain world, that lifeline on the other end of the phone will be a critical resource to ensure the loan matches the current business climate for your hotel.
2. KEEPING CURRENT WITH RENOVATIONS
Recently renovated hotels with the most up-to-date technology and décor will continue to be a popular choice for guests, and they’ll pay a premium to stay there. Lenders know this and want to make ensure owners have the money to fund refurbishment and modernization. After all, if the cash flow and value of your property increases, it makes for a safer, more-secure loan for the lender. You are both on the same team in terms of value. Having a floating-rate loan allows the lender to respond to new brand standards and market demands for whatever the latest trend may be. A bridge loan enables lenders with the flexibility to increase loan proceeds if they choose to, also permitting the owner to take advantage of the latest and greatest trend, thus driving revenue to the hotel that might have gone elsewhere.
3. NEW BRIDGE LENDERS ENTERING THE SPACE
As the other major commercial real estate asset classes face their own unique challenges, lenders increasingly turn to the certainty of hospitality cash flows. The experience of staying in a hotel cannot be outsourced or ordered online. This has driven many new lenders to the hospitality space looking to deploy capital. From a lender’s underwriting perspective, it’s relatively easy to underwrite hotel cash flow based on historical performance and leisure and business travel trends. As more lenders come into the space, the old adage of “competition beats negotiation” is very much alive. Interest rates have come down to the low and mid 5% range for non-recourse loans and remain even lower for recourse loans. Although bridge loans often float over various floating rate indexes (SOFR, LIBOR), and those rates will likely rise, inflation in the average daily rate (ADR) should also increase, thus offsetting the increase in the interest cost.
Times may be uncertain, but hotel owners can count on floating-rate loans to come in all different shapes and sizes and there are myriad options to choose from. A seasoned loan advisor can show you many different types of bridge loans to see what the best fit is for your property.