All Forum Posts by: Dan Wallace

Your risk at 5 year is not what fees the bank will charge but whether you will be able to get the note refinanced. All that has to happen is that the bank does want to have a hotel loan on their books any more, your financials do not meet their then current underwriting guidelines, the bank has been sold and the new owner no longer offers hospitality loans, the bank has a concentration in commercial and/or hospitality loans and regulators are requiring them to reduce their exposure, etc. All of these scenarios I have seen over the past few years. My point is a balloon note with a fairly quick term can be very risky considering there are comparable alternatives without any balloons. There may be rate adjustments but generally as long as you make your payments you will only have to worry about a rate adjustment versus the note coming due. Furthermore I am confident that the bank will not put in writing that they will automatically extend your note at year 5 or what the rates, terms and fees will be at that point. If this is a small market then you may be limited to your financing options but you should be aware of the possible financing hazards.

Depending on the property and your hotel experience and financial strength, you may be able to get conventional financing with only 15% or $330,000. There is a possibility the cash down payment may be able to lowered even more if you are able to pledge other collateral.

Otherwise I am not sure where you can get subordinate financing to facilitate an owner-carry note on a hotel.

Kyle, a couple of things. First, Scott hit on a number of very important aspects of the financing and I will only re-emphasize that the financing package you are getting is very "ok" especially with a balloon after only 5 years and only a 20 year amortization. I would also echo Scott's remark regarding hospitality experience. Hotels can be great investments but like any specialized industry there is a great need for industry-specific knowledge. As for the personal guarantees anyone with a 20% ownership or more will have to provide an unlimited personal guarantee to the SBA.

From my experience in both lending to hospitality projects and liquidating hospitality loan portfolios after the 2008/09 crisis I can tell you that a balloon after 5 years is very risky. The hotel property may just be getting stabilized. We are a boom/bust economy and regardless of how strong you think your project may be if there is an economic downturn around the time of your balloon you will be in big trouble. The franchisors recommendation for 25% in the project may be to account for cash flow issues while the property gets stabilized and to weed out under-capitalized franchisees.

One final thing, if this project is so great then invariably others will see the opportunity and will also move to fill the void in this market. Just ask all of the hotel owners in North Dakota how they are now doing after many moved to fill the housing void in the ND oil fields.

Best of luck

I may be able to help. What type of property are you trying to finance?

Send me a colleague request and we can go from there.

Hotel and motels can be tough and like any specialized industry they have unique operating and financing challenges. I have financed a few hotel/motels and know they can be very profitable but also very susceptible to economic conditions. My recommendations regarding learning more about this industry would be to find someone with operating knowledge of these properties and see if they will mentor you for a while before you try and jump into this industry.

Other suggestions would be to focus on limited-service, interior-corridor properties since financing these types of properties is much easier.

BTW, the spelling is generally Patel.

@Dan Cho if you would like to post the details that may be helpful. Appraisals, regardless of whether they are for residential or commercial properties, all must generally address the three approaches to valuation: Sales, Income and Cost. Commercial valuations are just more involved since more detail is generally given to the Income approach. However, in my opinion, the most difficult valuation approach is Income since there are more factors such as vacancy, expenses, rent escalators, capital improvements and almighty CAP rate.

The key to any appraisal is what assumptions are being used in the valuation process. This is why valuations can vary widely.

Best of luck and let me know if I can help.

What kind of project are you trying to get financed? Multi-family, office, retail, industrial, etc?

@Alan McCoy from a lender's perspective some of the key aspects of gas/c-store financing is a strong preference to a nationally branded station (incl. a solid refueling agreement), clean environmental (incl. possibly new tanks, etc), a owner/operator with experience, good access/traffic.

I lived in the Jacksonville area for a while and even owned an interest in a warehouse at the old Jax airport. So I am somewhat familiar with the area and may even have a few banks I know that may own some gas/c-store locations in their ORE portfolios but haven't checked recently.

I only have experience from the lender side of things but if I can help let me know.

Hi Dexter, the concept you are describing is fairly common and I think could be very successful. Executive/virtual office spaces were very popular a few years back and are now becoming very popular again with the surge of remote workers. You can get a very good mix of business types to rent office space, desk space, etc.

I will need to check but if structured properly you may be able to use a high loan-to-value SBA loan. That would preserve your capital and maximize what you could buy.

I have done quiet a bit of work in the Buckhead area of Atlanta and I would recommend surveying other executive/virtual office providers to get an idea of cost, availability, etc.

If I can be of help let me know.

Dan

I will review if you like.

You will need to send me a colleague request.