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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   May 2015

A Hospitable Investment

The hotel industry is gaining momentum in 2015

It is evident in the cities where we live and travel — big and small — that new hotels are being constructed, and established ones are being refurbished and modernized. The economy’s overall resurgence has meant a strong turnaround for many industries, including hospitality. But there’s more than just anecdotal evidence showing that resurgence.

A PKF Hospitality Research study projected that the U.S. lodging industry will achieve 65 percent occupancy this year, the highest rate since this data was first reported in 1987. The study also forecasted that by the end of 2015, demand for lodging accommodations will have increased by 25.8 percent since 2009. Furthermore, the study claims that all hotel chains in most major markets can anticipate higher revenue per available room (RevPAR) through 2017.

These predictions certainly support changes seen on the frontlines. Specifically, more hotel franchisees are pursuing funding to establish ownership or to significantly renovate properties.

The economy’s downturn left the hotel industry with a multibillion dollar backlog of brand-mandated refresh programs. Many hotel owners deferred their property improvement plans (PIP) because of financial hardship, turning their focus instead to streamlining business operations and minimizing expenses.

For the past few years, property-upgrade investments took a back seat as businesses worked hard to stay above water. Now, many of these long-awaited projects are finally coming to fruition, and that means more opportunities for lenders, borrowers and brokers.

Rising demand for financing

In the past year or two, many hotel franchisees have been able to put delayed projects back on the table. In addition to completing renovations, the stimulated economy has led to many hotel assets changing hands. Often franchisors will contractually enforce updates with the new ownership, hoping to reposition the property in the improved market.

A renewed focus on property improvements together with an increase in hotel transactions is driving a rising need for financing. To initiate either desired or mandated renovations, many franchisees are seeking short-term, bridge loans and capital expenditure (CapEx) loans. These options enable them to undertake everything from renovations to PIPs to brand conversions.

Today’s competitive hospitality landscape makes selecting a lender and obtaining financing a top concern for hotel owners. There are more cash buyers and foreign investors than ever, which encourages brokers to identify lenders that can close on these loans quickly.

Consequently, more hotel owners are exploring specialty lenders that focus solely on the hotel space, because a strong understanding of the business and the purposes of specified projects often translates into faster closings. In some cases, these lenders can close on CapEx loans in as little as two days and bridge loans in two weeks. Such loans typically take traditional lenders about 60 days.

Beyond an accelerated timeline, specialty lenders offer another major distinction: Unlike a traditional bank, these lenders take projected profit into account, not just a property’s past performance. They have the unique ability to evaluate the anticipated financial viability using metrics such as estimated RevPar, typically using historical property data as well as data from comparable hotels to determine this number.

In many parts of the country, hospitality
is an incredibly seasonal business.

Finding a specialty lender that has this capability gives franchisees the opportunity to complete acquisitions or renovations to stabilize a property before seeking permanent, long-term financing. Once they have a financially stable property, they are typically able to secure permanent financing at a better rate and with higher proceeds.

Construction loans

Construction lending has been strengthening alongside hotel lending. These lenders are more carefully vetting borrowers and employing methods to mitigate risk, because it typically takes a minimum of four years to stabilize projects. Lenders also are paying closer attention to the lifecycle of the loan in an effort to prevent costly project delays.

Another trend gaining traction in construction lending is the separation of furniture, fixtures and equipment (FF&E) expenses from construction loans. A specialty lender can work with a franchisee to carve these costs out of a construction loan, effectively lowering the cost to the construction lender and spreading the risk — which construction lenders almost always wish to accomplish.

In this case, franchisees and brokers often can get greater overall financing by working with two lenders simultaneously. At the same time, mortgage brokers can make their clients extremely attractive borrowers for construction lenders, because they  already have the green light and approval from another lender.

Increasing lender options

Mortgage rates are projected to remain attractive for hospitality projects throughout 2015, which should continue to attract new investors to the market. New lenders also are expected to enter the market, while additional  established lenders will likely create hotel financing arms to capitalize on the industry’s upward trend.

A greater variety of lenders will certainly give hotel owners and franchisees more to consider when making their selections. And, although interest rates and dollar signs are a natural first consideration when looking for a lender, owners and franchisees should also determine just how quickly potential lenders can provide necessary funds.

For instance, a franchisee might need financing to renovate the hotel’s pools and build patio bars, and want this project completed before the busy summer season. Alternatively, a franchisee that just acquired a hotel may be required to undergo a mandated refresh, or a longstanding hotel owner might simply be eager to complete a project that had been put on the back burner years prior. Whatever the case may be, the faster funding is secured, the faster the desired renovation can commence.

It goes without saying that lenders across the board are more carefully assessing prospective borrowers. Lenders today are determining more than just a property’s financial health when deciding whether to provide financing — they are looking at an owner’s personal credit and financial history. They want to identify whether owners themselves have personal funds to contribute if necessary and evaluate how they have historically managed their own finances.

Outside influencers

Other market influences will always affect the hospitality industry. Falling oil prices are one factor the industry carefully watches, because cheaper oil drives down fuel, making road trips and hotel stays more feasible and attractive for consumers.

The cyclical hotel market created by the seasons also influences lending. In many parts of the country, hospitality is an incredibly seasonal business, so lenders now wish to carefully monitor not just a hotel’s annual cash flow, but its monthly cash flow as well. Lenders do this to ensure that the owner of a beachfront hotel, for instance, will still be able to pay debt obligations during the slower, winter months.

•  •  •

The improved hospitality industry has driven new trends in hotel financing. More organizations and individuals are striving to participate in this strengthening market, and hotel franchisees are looking to specialty lenders as well as alternative financing options to accomplish acquisition and renovation goals. The key today lies in identifying new strategies and new partners that will be instrumental to a franchisee’s profitability in the near future as well as their financial success for years to come. 


 
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