It’s always difficult to explain to a first time commercial borrower why banks and lenders don’t get excited about hotels, motels and inns. This past week I received a call from an individual in the Yukon who was looking to purchase a motel and restaurant that had been owned by the same owner for over 20 years. Prior to calling us he had called three (3) of the big banks only to find that two (2) of them were not interested at all and the last one said that he needed 50% as a down payment before they would even consider the application. In contacting us he was hoping that we would be able to bring some options forward that didn’t require 50% down.
He didn’t understand why the banks weren’t interested in the transaction given the history of the business and their stable finances. I explained to him that hotels, motels and inns are considered for financing on a business valuation basis and not entirely on the underlying real estate. This is because the ability for a borrower to make his payments for a loan or mortgage comes from the room rental income that the property generates. Because people typically stay a few nights with no long term expectation of staying longer, banks and lenders have a difficult time getting comfortable that the past income can be expected in the future. Furthermore, a hotel, motel or inn is a single use property – it can only ever be a hotel, motel or inn. If a bank or lender needed to take the property back through foreclosure the market for hotel, motel or inn operators is smaller compared to the market for regular commercial property purchasers.
Another issue that banks and lenders have is that a hotel, motel or inn that is independent and not part of a major franchise lacks the marketing and sales resources required to draw people in. Independent hotels, motels and inns can be harder to fill compared to franchise or “flagged” alternatives. This factor contributes to a bank or lender having a hard time getting comfortable with future room rental income.
Private financing and vendor financing is usually used in conjunction with very low leverage traditional financing to acquire hotels, motels and inns. If you are considering a purchase of one of these properties, see if the property already has financing and whether or not they will be interested in financing your transaction. Maybe ask the vendor if they will carry some financing as well.