Current interest rates are at historic lows. Yesterday, the Federal Reserve cut the Prime rate to 4.75% and the 10-Year Treasury has been hovering around 1.7% to 1.8%. However, The Fed has indicated that it will pause any further rate cuts in the near term. Meanwhile, hotel values are strong, and hotel lenders are offering very competitive terms.
CMBS loans offer numerous advantages to hotel borrowers; such as the ability to fix a low interest rate for a 5, 7, or 10-year term. Lower interest rates offer lower debt payments and higher cash flow. Current CMBS interest rates are starting in the mid to high 3.0% range and rates are fixed for the length of the term. CMBS interest rates can fluctuate daily because the rate is typically based on the 10-Year Treasury yield. The minimum loan amount is typically $5,000,000 with some lenders going down to $2,000,000. Additionally, CMBS debt can offer attractive leverage, allowing owners to capitalize projects with less equity and do more deals. As non-recourse debt, CMBS offers some risk protection which appeals to investment groups.
CMBS loans are assumable to a qualified buyer. This means that even with a 10-year term, if you decide to sell after 4 or 5 years, the buyer can assume the existing CMBS debt. If interest rates increase, the low fixed interest rate could be an advantage. The downside is that as the loan nears maturity it may become less attractive for a buyer to assume the loan due to the costs involved to refinance in just a few years.
There are some features that borrowers need to be aware of when getting a CMBS loan. CMBS loans usually include a cash management clause, minimum DSCR (debt-service-coverage-ratio), pre-payment penalties, and reserves. Additionally, once closed there can be lengthy approval processes to make major changes like re-branding. It helps to have an experienced CMBS advocate in your court to negotiate the most favorable terms during origination or assumption.
Alternatively, borrowers can also get historically low interest rates through the SBA 504 loan program, or the SBA 7A loan program (somewhat higher, but still attractive rates). A 504 loan structure consists of two parts – a first mortgage from a bank or non-bank lender generally at 50% CLTV, plus a subordinate loan directly from the SBA and typically 30% CLTV. The total of those two loans equal the entire loan amount required by the borrower. Current SBA 504 blended rates are very low, about 5.25%. SBA 504 loans are highly leveraged with up to 85% loan to value. One key benefit of the SBA 504 program in this time of low interest rates is that the SBA loan portion has a fixed interest rate for the entire term of the SBA loan. The loan term for the SBA loan part is generally 20 years, but 25 years is also an option now at a slightly higher rate. Underwriting can take longer with a SBA 504 structure, and there are tight requirements. Additionally, the maximum loan amount per borrower on just the SBA loan part is $5,000,000. However, if the hotel meets the criteria for a “Green Project” through renovations to meet new energy efficiency and sustainability standards, the loan amount for just the SBA loan part can increase to $5,500,000. With the two-part loan structure, the total loan amount on a 504 can go as high as $12,000,000 to $15,000,000, depending upon the loan maximum criteria of the first mortgage lender.
SBA 7A lenders are motivated to keep spreads low and offer very competitive terms. SBA 7A interest rates are typically around 6.00% to 7.00% and variable, with a 25-year loan term. The loan to value is generally high, up to 80-85%. Often if there are challenges to get financing, then the SBA 7A loan program is the best chance to get the deal done as the lender receives a 75% guaranty from the SBA, plus, some underwriting criteria are more liberal than other loan programs.
The low interest rates available makes NOW a great time to refinance existing hotel debt, or finance a hotel acquisition.
Use Hotelloanhub.com to apply online and compare loan terms for CMBS as well as conventional, and SBA.