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Follow the Money: What You Need to Get Hotel Financing

Follow the Money: What You Need to Get Hotel Financing

Lending is coming back, and some lenders are less cautious than they used to be. This means that an experienced hotelier with a successful track record going into a market that has a need is going to get a deal done. It also helps to put in a good amount of equity and find a lender that believes in the project. Here are few other things to be aware of:

Factor in the PIP
If there’s a large property improvement plan (PIP), then you need to add it to the sale price, because it’s going to be part of the financing request. “Every hotel company is going to want to get their pound of flesh from the new operator,” says Greg Morris, managing director of Bellevue, Wash.-based Premier Capital and Associates. “If you’re buying a Hampton that’s a bit dated and Hilton wants to maintain the flag, then it’s going to ask for a pretty significant PIP to extend that franchise tag.”

Get the Right Package
Figure out what type of financing you and your investors are looking for. “A CMBS-type of finance structure is going to give you pretty good leverage, but you’re going to be tied up in it for a while and you won’t have a lot of flexibility on the back end,” Morris says. “If you’re willing to guarantee, do lower leverage, and maybe get a better rate, then I can take you to a bank.” Banks will typically supply three- to five-year loans. “As their balance sheets return to health, banks are selectively looking for development financing opportunities,” says Angelo Stambules, head of the capital markets group at Hunter Hotel Advisors. He notes that bank debt is still in the 60 to 65 percent range of construction financing. “On CMBS, you can get up to 80 percent provided you’re willing to incorporate a mezzanine loan into that deal.” If you’re looking to quickly get in and secure an asset, then you may opt for a balance sheet loan. “This will allow you to hit your performance criteria and refinance out of it to recover your equity,” Morris says. “With a bank loan, you aren’t going to get as high of a leverage and you’re going to have to guarantee, but you’re going to get lower pricing and more flexibility in your structure on the exit.”

The Myth of New Construction
By and large, the banks haven’t warmed up to new development because they get a better return with a lower risk from financing existing stock. “As long as existing assets are available, the banks are going to go after those first,” Morris says. “The stars have to be aligned for a bank to do a new construction deal. A $12 million loan on a select-service property in a secondary market is still a tough thing to get done. But as lenders build out their portfolios, they will supply better terms. “With assets performing well, investors are comfortable investing in this space, and they’re realizing that they have to be competitive,” Stambules says.

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