Hotels Must Renovate to Stay Relevant. Here’s Where You Can Find the Funds

The look and feel of your hotel defines your brand, sets a tone and shapes your guests’ experience. Guests and other customers will form an instant impression when they step through your door. In the hotel and hospitality business, it’s especially critical to keep your facilities fresh, comfortable and welcoming. If your space looks or feels dated or lacks expected amenities, your guests won’t be back. That’s why companies acquiring new space should remodel to make it their own, and regular renovations should be part of a prospering firm’s business strategy. Some say the hotel industry standard is to renovate every three years. The need for frequent renovations is so well-recognized that when buying a hotel, the franchise may require a property improvement plan as part of the deal. But remodeling can require a big financial investment. Even a limited refresh can exceed available resources. Most often, it makes good business sense to finance renovations. There are several other options for financing renovations.

Off-the-shelf options

A business line of credit may provide enough cash to cover small remodeling projects or repairs. But in most cases, it’s going to take a lot more. Bridge loans can help get a quick start on necessary renovations while negotiating longer-term financing at more favorable terms, but of course, that’s a temporary solution. Businesses with a strong credit standing and a relationship with a lender can always seek conventional bank financing. These loans are usually short-term and require the borrower to put up 20 percent of the project costs. Funds may be disbursed on a draw schedule tied to completion of project milestones. Lower rates, better terms, and longer payment schedules may be available by pursuing a commercial renovation loan backed by the Small Business Administration and described in more detail below. But there is another innovative solution that lets you leverage the value of equity in your property to obtain cash for renovations. This option is known as a sale leaseback.

Sale leasebacks

In these deals, you sell a property, building or other valuable fixed asset—and then lease it back from the buyer and continue to do business without interruption on the property. This generates a reliable, long-term stream of income you can use for any purpose, including periodic renovations. The buyer gains an investment property with a stable, long-term tenant and steady rental income for the term of the agreement. Leases are usually at least 10 to 15 years, but they can run as long as 40 years. These deals often use triple-net leases, where the seller-tenant continues to pay for insurance, taxes, maintenance, and other expenses. These costs—including the lease payments—are generally tax-deductible for the tenant operating the business. Sale leasebacks can provide faster financing at attractive rates. They offer greater flexibility to spend funds as you wish on your schedule, without regulations. For more information about the benefits of sale leasebacks, consult with us at ZEL Capital Partners. We are experts in guiding businesses through the sale-leaseback process to free up the value in their commercial property and identifying investors looking to acquire quality commercial investment property with an attractive return and little risk.

SBA-504 loans

For businesses who qualify, SBA loans are another potential source of funding to renovate, retrofit, modernize or remodel an owner-occupied business. There are two SBA lending programs widely available through lenders for this purpose. SBA-504 loans are useful for major renovations, conversion or modernization of a commercial property. They cover land improvements such as gardens and landscaping as well as community improvements such as sidewalks. They can also be used to purchase or lease and install new equipment, buy furnishings and upgrade plumbing and electrical systems. These loans feature below-market interest rates tied to the Treasury note rate and repayment over 10, 20 or 25 years. Related costs such as equipment delivery and installation, engineering reports, and even appraisals, attorney fees and closing costs can be included in the loan. SBA-504 loans are available through Certified Development Companies (CDCs), the SBA’s local lending partners. The CDC will finance 40 percent of the project up to a cap of $5 million, with 50 percent from a conventional lender. This limits your outlay of operating cash to 10 percent of project costs.

SBA-7(a) loans

Another SBA program provides loans that can be used to purchase or renovate a building, or as operating capital. These are usually variable rate loans. With a 7(a) you can also purchase equipment or inventory and consolidate business debt. If the majority of the loan proceeds are used to finance the purchase, refinance or renovation of real estate, 100% of the costs can be financed, preserving your working capital. The repayment term may be up to 25 years. Both types of SBA loans have some drawbacks: first and foremost, as the name implies, they are intended for small businesses. Borrowers must qualify, and the loan amounts max out at about $20 million, which may not cover a major project. Borrowing through a federally backed program with two lenders involved also generally requires more paperwork.

Assess your options

To keep your guests and customers coming back, it’s important to plan ahead for short-, medium- and long-term updates and upgrades. That means planning for a line of financing that can cover these costs. At ZEL Capital Partners, we are experts in structuring financing for hotels, restaurants, medical offices, manufacturing companies, and businesses in the third-party logistics, cold storage, and automated warehousing sectors. And because we also advise investors seeking solid real-estate investments, we can pair you with funding sources.

Contact Us to discuss your options for financing your specific needs.