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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   February 2012

It’s Time to Upgrade

Hoteliers are in the market to finance brand-mandated renovations

Commercial mortgage brokers  who work with hotel deals may spot a growing need for the financing of renovations in the market this year. Franchisees of hotel brands seem to be under growing pressure to carry out upgrades that keep them within brand standards.

This requirement for brand-mandated refreshes, known as product-improvement-plans (PIP), was put off in the downturn as hotels’ franchisees were double-squeezed by tight lending and curtailed spending by travelers. This delay in PIP investment has resulted in a substantial backlog in hotel upgrades, improvements and refreshes that must be implemented in the next couple of years — a backlog that’s expected to create a demand for industry-specific financing.

The hospitality industry has shown signs of recovery this past year. Revenue-per-available room (RevPAR) in the U.S. was predicted to increase by 8.1 percent in 2011, and by another 6.2 percent this year, according to research company PKF-HR. Although the industry is not completely out of the woods, brands have demanded that hotels quickly conform to their contractually required upgrades. These include renovations such as replacing worn furniture, fixtures and equipment and introducing new concepts — for example, in lobby design.

When savvy mortgage brokers work with local hotel owners to find viable options for financing, they can create value in their advisory role by considering the following: 

  1. Credit is king: Borrowers typically provide a personal guarantee on these loans, so be sure that the hotelier’s credit score is higher than 700.
  2. Experience counts: Seek a lender that is familiar with the hotel industry and is willing to provide past references.
  3. Watch for special interest: Be cautious of funding sources that are also owners or operators of hotels.
  4. Right fit for franchisors: A lender that comes highly recommended by the franchisor will be most familiar with the specific brand requirements.
  5. Budget carefully: It is strongly recommended to include a little extra for unplanned issues that inevitably arise. It is always preferable to have a budget cushion than to ask the lender to increase the loan.
  6. Complete a post-renovation pro forma: Create a pro forma that reflects the new RevPAR as a result of the renovation. Projected hotel performance after renovation is important to the lender.

Currently there are less than a handful of lenders with in-depth renovation and bridge-financing experience. These lenders typically will work with qualified franchisees of major hotel brands throughout the United States. That is why it is important for brokers to develop strong relationships with franchisors and position themselves to take advantage of this market opportunity.


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