Hotel refinance loans, and when refinancing a motel pays
Refinancing a hotel pays when the new loan lowers your payment, fixes a rate before it resets, pushes out a maturity you can’t meet, or frees equity for a PIP or another property, and the savings beat the prepayment penalty and closing costs. A lender sizes a refinance the same way it sizes a purchase, except the appraised value replaces the price.
The four reasons owners refinance
- A maturity or balloon is coming. Bank and CMBS hotel loans often come due long before they are paid off, with most of the balance still owed. Start a year ahead; a hotel refinance can take months.
- The rate is about to reset, or a variable rate has climbed.
- Cash out for a PIP, a renovation, or the down payment on the next property.
- Buying out a partner. The new loan pays off the old one and the departing owner.
How the new loan is sized
The lender takes the trailing twelve months, works out NOI and divides by its minimum DSCR to find the largest payment it will accept. It turns that payment into a loan amount at the new rate and term, and caps it at a share of the appraised value. If the hotel’s income fell since you bought it, the refinance may come in smaller than the loan you have now. That is the case to catch early, because the gap has to come from your pocket at closing.
Put the trailing twelve months and the appraised value into the hotel loan calculator, with the new rate and amortization, and compare the result with your payoff.
What it costs to get out of the old loan
Read the prepayment section of your note before you talk to a lender. Hotel loans use three kinds of penalties:
- Step-down: a percent of the balance that falls each year, such as 5-4-3-2-1.
- Yield maintenance, which makes the lender whole for the interest it loses. It is expensive when rates have fallen.
- Defeasance, common on CMBS loans: you buy Treasury securities that replace the loan’s payments. It needs a specialist and can cost a lot more than the penalty on a bank loan.
SBA 7(a) loans with a maturity of 15 years or more carry a subsidy recoupment fee, paid to SBA, if you voluntarily prepay more than 25% of the loan in any one of the first three years: 5% of the prepaid amount in year one, 3% in year two and 1% in year three (13 CFR 120.223, SOP 50 10 8.1).
Refinancing into SBA
Owner-operators with a bank or CMBS loan sometimes refinance into SBA 7(a) or 504 to get a longer amortization, which lowers the payment. SBA sets conditions on what debt it will refinance, such as how the old loan was used and whether the new one helps the business, and the lender checks those against the current SOP. See SBA 7(a) for hotels and SBA 504 for hotels.
When you have the numbers, send the refinance to Janover Capital.
Questions people ask
Can I refinance a hotel loan with SBA?
Yes, in many cases. SBA 7(a) can refinance existing business debt when the new loan improves your terms or cash flow and the old debt meets SBA's conditions, and SBA 504 has its own refinancing options for fixed-asset debt. Your lender checks each debt against the current SBA rules.
How much cash can I take out of my hotel?
The lender caps the new loan at the smaller of a share of today's appraised value and what the NOI supports at its minimum DSCR. Whatever the new loan is above your payoff and costs is the cash out. Use the calculator with the appraised value as the price.