Conventional loans are serviced by a traditional financial institution that are secured by a first lien position. Conventional loans do not require the borrower to have previous borrowing experience. They may also be used for small loan balances and specialty properties.
The LTV for a conventional loan for a hotel have a maximum of 75 to 80%. Borrowers should have “hard cash” equity invested in purchase transactions, and should be able to maintain a post-closing liquidity sufficient to service their debt for several months as well as an overall net worth equal to or greater than the requested loan amount.
Term and Amortization: The term and amortization depend on the lending institution and the type of property. The term can vary from 3 to 15 years while the amortization will be in between 10 and 30 years.
Recourse: Conventional hotel loans can be full recourse, limited recourse, or non-recourse.
Loan Assumption: Conventional hotel loans may or may not be assumable. Assumption usually occurs when a borrower sells the property that secures the loan and the purchaser takes over the loan.
Yield Maintenance: (Loan balance at time of payoff) * (note rate - new cost of funds) * (# years left in loan) * (365/360)
Breakfunding: (Loan balance at time of payoff) * (original cost of funds - new cost of funds) * (# years left in loan) * (365/360)
Declining (Step-Down) Prepayment Penalty: A declining prepayment penalty may be structured in a variety of ways, but always has the same feature of the prepayment penalty lessening by 1% per step with the last 3-12 (or more) months open to prepay or refinance without penalty.