For a number of reasons, hospitality services have been very profitable lately. Wisely, the industry is using these times to invest in new technologies that improve processes and experiences. Some of these changes are obvious, personalization for valued guests and smart-room technologies with lobby integrations for example. However, it’s the less talked about advancements never seen by consumers that are making some of the most significant impacts on the growth and success of hotel real estate.
This is particularly true with hotel lending. Technology has streamlined the borrower application and underwriting process, a workflow that has remained largely unchanged up to this point. The new approach has been reimagined from a fresh perspective (rather than updating dated and broken workflows), and the implications of this change have the potential to radically impact the bigger world of commercial real estate.
The traditional loan application process has been by-and-large frustrating, time-consuming and oftentimes complicated. In most cases, borrowers have been required to submit sensitive and pertinent documentation either in-person or via email attachments. After submitting, the lender must double check to ensure the documents were received. And even if the documents have been received by the financial institution and are deemed complete and accurate, it isn’t always clear if every department within the same organization (such as business development and underwriting) have access to the same data and documents. As a result, many applications remain in a state of limbo for an unnecessary period of time and borrowers do not have any type of view into the status of their request. Naturally, tensions can run high.
The good news is that digital lending platforms seem to finally be making inroads. While online loan applications aren’t necessarily new, extending the automation of tasks through to underwriting and other areas of the lender’s back office are improving the speed and quality of loan decisions. Why does that matter? More borrowers are gaining quicker access to the capital they need to fund new projects with confidence.
Every lender’s policies are different, but there are ubiquitous commonalities to the borrower loan application process. So, it makes sense that a universal loan application exists to detail the criteria needed from prospective borrowers. When forms are standardized and presented in a digital, dynamic format, whereby questions are based on the borrower’s previous responses to things like loan type and purpose, lenders receive loan requests that are more complete and easier to decision.
Another emerging concept in hotel and real estate financing is leveraging a single, digital portal to streamline checklist activity such as uploading or accessing documentation and monitoring the status of an application. This is especially important when there is a borrower consortium for a loan, quite common in the hotel industry. Each person in the group can upload respective personal financial statements that are confidential and only accessible by the lender. Borrowers gain the efficiency to easily manage how this data gets contributed to the lender. And in turn, lenders can better manage their own custom due diligence checklists of what’s needed from the borrower, helping eliminate frustration and preserving the borrower-lender relationship.
With more lenders and borrowers uniting on mutually beneficial marketplaces, the manner in which loans are applied for and processed is changing for the better. It’s far less tedious and time-consuming; a loan decision that normally took 60 to 90 days can now be executed in well under 30 days.
While many banks and some credit unions offer hospitality financing, it is a niche field and there are lending hurdles, especially for new builds or construction projects. For this reason, frustrated borrowers often look to private lenders. One such Dallas-based direct private lender closed nearly $400 million in hospitality loans in 2018. And while there is a host of reputable private lending firms for borrowers to consider, the interest rates on offered loans are usually higher than a traditional lending institution. This leaves borrowers in a pickle.
According to the American Bankers Association 2018 “The State of Digital Lending” report, banks are seeking to compete with non-bank lending firms by expanding digital lending channels. While the report noted that many traditional banks offer “some form of digital capabilities around lending,” such as loan status, loan payments and basic account information, “the majority of banks’ lending processes, including online applications, onboarding, processing, underwriting and funding, have yet to be overhauled through technology.”
Now, streamlined lending marketplaces offer borrowers the opportunity to negotiate the best loan terms from even the traditional lenders–all with one application. Recall the aforementioned digital loan portal. This represents a huge step forward in lending, especially given that in the past the borrower would fill out a loan application for every single lender, inputting the same data in the same required fields several times over. This can deter an otherwise well-qualified borrower who grows weary of the process to truly seek out the most competitive rate, agreeing possibly to an offer that’s merely the “best” within a limited scope. Or, the borrower gets careless with duplicative data entry and provides incorrect information or misses required fields altogether.
Alternatively, online lending platforms enable borrowers to simplify data entry by requesting it just once and submitting a standard application to multiple lenders with one click. Information is repurposed across requests and can be updated over time as needed for future loan requests. In a marketplace format, applicants can indicate what type of lenders they are seeking and which loan programs they are open to. The lenders, in turn, can target the type of borrower they would consider engaging and avoid needing to manually filter through hundreds of applications.
Lenders and borrowers share the same frustrations with the loan application process. Whereas a borrower may be overwhelmed by the process, a lending officer may also grow tired of triple-checking, for example, that all forms are completed and signed. These back-and-forth exchanges ultimately take a toll on the borrower-lender relationship. But by engaging a digital loan platform, the platform essentially becomes the application manager alerting both the lender and the borrower about the status of the loan application, what forms are required and when, or when the lender has made a loan decision.
Closing the deal
Digital lending platforms are an industry game changer for delivering that loan approval too. Deals can happen more quickly because all documentation related to the project is housed in one secure location. Critical loan data is current and always at the ready. As a result, informed decisions are made in real time about a project, be it an acquisition, new construction or refinancing.
Whether a borrower is experienced or inexperienced in hospitality, technology is leveling the playing field. And while industry experts have historically advised borrowers to allow at least three months for the loan discovery and selection process, tech tools, in many cases, have reduced the application process time by two thirds or more.
Hospitality is considered one of the more complicated and riskier commercial real estate loans. The evolution toward a more modern way of lending will translate to address the common challenges found across all commercial real estate. Technology has provided a way to streamline the borrower application and underwriting process, and its use is only going to grow.