Financing Resorts and Hospitality During a Pandemic

As the hospitality industry slowly recovers from the initial upheaval of the pandemic, there’s both optimism and a sense of uncertainty moving into the future — especially when it comes to financing.  Although hotels are on the rebound, remote, drivable resort destinations are still in a much better position than hotels.

With the pandemic fostering a more unpredictable environment, financing options are limited with lenders wary of handing out large loans.

So what loan options are available to you?

First, before diving into which loan opportunities might work best for you, understanding the lender’s mentality in this climate is imperative. At this moment, lenders won’t be looking for high-risk opportunities. And hotels in particular are still struggling (unlike resorts).

According to a recent survey by the American Hotel and Lodging Association (AHLA),

“More than 2/3 of hotels (67%) report that they will only be able to last six more months at current projected revenue and occupancy levels.”

Without assistance, they will continue to lay off employees.

Hotels pose a far greater risk for lenders in comparison with remote, drivable resort locations.

Resorts, on the other hand, continue to attract guests even during the pandemic. In another AHLA survey, they found road trips will be the popular travel venture for the year with “72% planning an overnight vacation via car over the next five months.”

The allure of remote, drivable getaways for travelers centers on the ability to properly social distance, escape jam-packed cities, and avoid cramped plane rides and overly-crowded vacation destinations. Lenders have started to understand the appeal of drivable resort destinations in this environment and they are beginning to be more flexible regarding lending on these assets knowing that guests are still flocking to resorts.

The Rise of Remote Work

Another factor that is making resorts successful is the rise of remote work. As companies transition their workers to home offices, living close to your office is no longer a requirement, with many now seizing the opportunity to move out of the city for more space — often spending less than they would renting a home in the city for the same square footage.

Because of this shift, sales for cabins, townhomes, and condos outside of the cities have seen a huge surge with many looking for more than just a vacation home. Rather, people are seeking out a co-primary residence, a recent phenomenon due to the pandemic. Where pre-pandemic, a vacation home or rental might only be used for a few weeks out of the year, now these types of homes are more than just a getaway, they are seen as on par with a primary residence.

To keep up with this new demand, resort owners are building more units that are perfectly equipped to meet the new needs of living post-pandemic. For instance, resorts offer countless outdoor and socially distanced activities, and amenities like grills, patios, pools, office space, and in-unit laundry facilities, allowing guests and renters to enjoy conveniences while staying quarantined and socially distanced.

Note that even though your resort may be seeing higher occupancy rates and increased revenue, lenders will still need assurance, and will look to see if you have a strong history in hospitality management and if you have a proactive, transparent operating plan for the future.

Also be aware that not all lenders understand the difference in various hospitality assets, making it essential to work with a good real estate broker who can help teach the lender that it is “safe” to lend on resort assets, and connect you with the right mortgage broker and/or lender. If a lender confuses your resort for a hotel, they may make their financing decision solely based on struggling hotel statistics instead of the data showing drivable resorts are thriving.

Financing Options

Now, with a better sense of what to expect from lenders, here is a look at loan opportunities to help you discern which financing option is best for you.

SBA Loans

As the hospitality industry, specifically drivable resorts, continues to rebound, SBA loans remain an option.  Government-backed SBA loans reduce the risk of the lead lender by taking on a percentage of the debt.

This also allows a borrower to limit the amount of equity invested in the resort asset. In certain cases, a borrower can even use a small portion of seller financing to meet the equity requirements.

Seller Financing

Seller financing can help you get around many of the requirements prescribed by typical loan providers.  With resort owners motivated to sell and fewer financing options available, seller financing becomes an appealing option for both parties.

And while you’ll likely be able to negotiate a more flexible lending plan, seller financing typically comes with a shorter term, requiring you to pay back the loan in full in as little as 5 years.

Conventional Loans

Conventional loans will be difficult to come by for hotels, but many buyers and sellers are still getting resort deals done with conventional financing. Conventional financing typically requires lower leverage, strong historical financial performance, and a strong resort management team. To execute on a conventional loan you’ll have to ensure your lender understands the difference between a hotel and a resort.

Often, lenders lump hotels and resorts together, overlooking the fact that drivable resorts are flourishing while most hotels are still struggling financially.  If your lender mistakenly believes your resort is performing like a hotel, you’ll inevitably be denied the loan.

Life Insurance and CMBS Loans

Life insurance and CMBS financing may be a good option if your resort is newer, in tip-top shape, and you can show consistent historic financial performance. Because life insurance companies and CMBS lenders avoid distressed properties, you’ll have to prove strong financials, a well-maintained property, and a professional management plan going forward.

Many times, these loans are non-recourse and have stringent underwriting requirements.

Frank Jermusek

Frank Jermusek, J.D.

President / Managing Director

Frank Jermusek is a Principal at SVN | Northco headquartered in Minneapolis, Minnesota. SVN has become one of the most recognized commercial real estate brands in the world with over 200 offices globally.