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Updated over 8 years ago on . Most recent reply
![Kyle Davis's profile image](https://bpimg.biggerpockets.com/no_overlay/uploads/social_user/user_avatar/478863/1621478478-avatar-kyled23.jpg?twic=v1/output=image/cover=128x128&v=2)
Hotel Investing/Down payment
Hello My BP friends. I have a situation. I'm getting into the hotel investing scene and have a situation. I'm planning on building a franchised hotel in my market location and already have many of my "ducks" in a row. I got a slam dunk financing package, I hired a 3rd party feasibility study to create the feasibility study and give me a 10 year pro-forma (Which looks great by the way), have my contractor lined up and have everything ready to go except the down payment that the bank is requiring (20% down). So here's the rub: The franchise actually recommends having at least 25% down (which in our scenario is $1,000,000). I currently have 500k raised. Technically, the bank will allow us to go forward if we only have 20% down (which is 800k). I have a strong chance to lock in a gap loan fund to get us the remaining 300k, but at the end of the day that is a loan and I will have to pay it back. The interest on it is slightly higher then the banks. For the record, the bank quoted me 4.25% interest over 20 years, balloon at 5 years. Gap loan is around 5% with same year terms. Personal guarantee for the main bank is 125% of your cash in the project. SBA is making one of the partners (probably going to have to be me) sign an unlimited personal guarantee on $1,000,000 of the loan. (The other main bank is doing $2,000,000).
I've done many 0 down deals with single family homes, tri-plexes, etc etc etc and I'm perfectly comfortable with that model as I know the local real estate like the back of my hand and know how much to pay for properties to cover my rear end in case I need to liquidate. (Making sure I'm at 70-75% LTV AFTER I repair the property). But the properties I invest in are very cheap and if crap ever hit the fan with them I could easily pay for the monthly costs until they sold. But now this project is in the millions and if crap hit the fan and I couldn't work out a loan modification, I would have to declare bankruptcy. I could weather the 125% of my money in the project, but the unlimited personal guarantee on the $1,000,000 would screw me.
So where I'm struggling on is that I know it's a slamming good deal, the demand is there, the numbers make sense and I'm very confident in the project. I've already spent 24k on the project so far so I've been putting my money where my mouth is. But on all the other deals I've ever done I have always ran a "worst case scenario." And I've always been comfortable with that scenario if it ever hit. This one is different though as it would basically mean bankruptcy.
That being said, is anybody on here in the hotel industry or large apartment complex industry that could throw a couple pointers my way?
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@Kyle Davis you sound like you are on the right track. There is no getting out of the personal guarantee especially in SBA lending and $3.2MM loan amount. It is a little unusual to be honest that you can get a loan to do a ground up construction hotel without any hotel ownership experience but if you have a strong personal and other assets or investors they can maybe look past that.
The bank is going to take a hard look at your feasibility study to make sure they area needs the hotel. You may want to work with the bank to have them choose and order the feasibility study so the person you use is on their approved list and they feel like they have the expertise to do the study. Also, there will be a STAR report which will provide average occupancy, average daily rate, revenue per available room, supply, demand, etc. Your contractor will be underwritten to make sure they have the experience to build the project.
They will also consider what tier of your franchise flag will be used compared to others and for the location. The franchise will suggest you have 25% because you need post-closing liquidity while the hotel ramps up to reach stabilization and occupancy. I would think the bank will require that as well as the number 1 failure of businesses is lack of working capital.
Your rate is very good but your terms could be better as you could go with a higher rate that adjusts every 5 years but get a 10 year balloon note and a 25 year maturity or even some will do no balloon note 5 year adjust on a 25 year amortization. Remember if your note balloons you will have to renew which means going through credit process again and probably more fees/appraisals so something to weigh as far as lower rate with short term vs higher rate with longer maturity. Ever bank prices a little different.
You probably have a pretty good handle on things as an appraiser but I would suggest maybe getting a partner with hotel experience to help you out but that is definitely a personal choice.