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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2011

6 Keys to Hotel Financing

Finding funding for clients with lodging deals depends on these factors

6 Keys to Hotel Financing

Although every deal has its own  set of issues, finding financing for hotels, motels and other lodging properties can be a little more challenging than for other property types.

With lodging, the property is literally the business, with many moving parts that all must be considered, from the appraisal to the possible use of equity investments and from management experience to the specifics of the loan itself. All these factors play a part in the process.

Commercial mortgage brokers should keep the following six factors in mind when financing a hotel deal.

What’s in a name?

One major issue when financing lodging deals is whether the hotel or motel is flagged or unflagged. Flagged hotels have recognizable names and tend to get better rates and terms and larger appraisal values than similar, unflagged hotels.

"With lodging, the property is literally the business, with many moving parts that all must be considered."

Unflagged hotels don’t have recognized hotelier names or affiliations. Even when professionally managed, these establishments can get a lower valuation based on the notion that tourists look for a hotel with a familiar name. Tourists may love the idea of the boutique hotel, but when it comes to finding a safe place to stay, they often feel they have a better idea of what to expect from a flagged hotel.

Flagged hotels also have management that has been trained similarly, so, at least in theory, they know what they are doing or have someone to call.

Who’s in charge?

Regardless of flagged status, a hotel’s management is vital to its financing. No matter how great the borrower’s credit score or how massive the business’s income, experience will be a major factor with the financing.

When investors plan to purchase an apartment building, they can hire a property-management company to lease the building and handle any issues as they arise. With a hotel, on the other hand, there are always issues that must be addressed — these are 24-hour operations.

Whether borrowers are running the operation themselves or using a management company will play a factor in the financing. And if the borrower has never worked in the hotel industry or if the property cannot reasonably support the addition of a full-time management team, lenders will notice.

Determining values

Brokers should prepare their clients for potential discrepancies between what the appraiser, the borrower and the lender or equity investors feel the property is worth. Also, advise borrowers to never order their own appraisal; the lender or investor will do this.

Brokers, however, should have the property’s financials for at least the past two years. This includes tax returns, as well as the profit-and-loss statement, balance sheet, cash-flow statement and anything else you can find. If a certified public accountant has created and reviewed these documents, they should be fine; if not, you may want to consider having them reviewed to make sure everything is in order.

The equity factor

This is where things can get a little hairy legally. When you are structuring a loan for a property, you should know your state’s requirements as they pertain to your deal. In some cases, a deal may require equity investors. When you have equity investors, brokers should contact their compliance department or a lawyer who is familiar with this type of deal structure to ensure that all requirements are met.

Get the right lawyer

Most brokers already work with trusted attorneys, but with lodging deals, you may want to consider using a lawyer who understands the sector. This does not mean you have to hire someone from a major firm. Instead, touch base with your regular lawyer. If she is comfortable handling the deal, that should be fine. If not, however, ask for a referral of someone she trusts.

Laws vary from state to state, and it’s best to err on the side of caution in these situations and find solid legal help. Some lodging loans are fairly straightforward. With hotels, however, lenders may include caveats to make sure they are covered in various scenarios. This is where lawyers prove their worth and can help make sure you and your client are protected, as well.

The lender’s experience

All lenders are not created equal. That being said, when it comes to selecting a lender, the best rates and terms are not always the best options. Make sure your lender has closed lodging deals before and often.

There are many commercial lenders, conduits, banks and others that will try to sell their ability to close anything, but you don’t want to risk what could be a lifelong relationship with your client by using a lender inexperienced in hotel financing. Ask potential lenders about the number of lodging deals they have closed, as well as the type and size of their financing. A lender may not have these figures offhand, but if it cannot give you at least a handful of deals it has closed in the past couple of years, you may want to keep looking. 

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This is by no means an exhaustive list of all the considerations in hotel financing. With these six major issues in hand, however, you will be better prepared to secure financing for hotel projects, and you’ll know what to look for if issues arise.


 


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