Acquiring financing for new hotel development or acquisitions of existing properties has been near impossible over the past several years. The tepid recovery of the economy combined with a lack of new hotels, has, in fact, created a more favorable environment for investors seeking hotel projects.
Don’t get overly excited, though. Lenders haven’t thrown their doors wide open by any means. Rather, they’ve been exhibiting a willingness to loan to well-conceived hotel development projects and well-located acquisition opportunities. There are quite a few qualities lenders look for in a borrower, and without these, your options could be limited.
What Lenders Look for with Hotel Financing
Feasibility – How likely is it that your hotel project will be feasible based on your resources, team, and experience? Make an excellent case for yourself, otherwise, don’t expect yes for an answer.
Location – It could be tricky to finance a hotel project in a saturated location, or an “up and coming,” location, especially if the investors aren’t convinced of the up and coming part. Explain thoroughly why you’re convinced the location will be successful and listen thoughtfully to any reasons why it might not be ideal.
Experience of Operator – This is a tough industry and market. Experience doesn’t equate to success every time, but it typically helps. If you have great experience, show them, if you don’t, prove to them why your plan will be a success.
Condition of Hotel – If the hotel already exists, how much of an overhaul is it going to require? Have renovations and re-branding been thought through and included in the proposal? Impress the investors with a comprehensive plan of how you’re going to enhance what is already working, or how you’re going to renovate what isn’t.
Generally speaking, lenders will consider the valuation of the asset and calculate a cap rate on the margin of the operations historical profit performance. Cap rates are typically calculated on the NOI (net operating income), which is measured after deducting taxes, insurance, 4% capx reserve, 3% management fee and sometimes other line items required by a particular lender.
Currently, we’ve seen cap rates quoted from 8.5% to 8%, or lower, for premium deals usually associated with premium locations and markets, i.e. Silicon Valley. Non-recourse financing is difficult, but not impossible, to obtain.
Investor owners not having the necessary hotel management experience are well advised to engage a professional hotel management company, such as HMGHospitality.com, and a knowledgeable hotel real estate broker with experience in obtaining the best loan rates and conditions. It’s absolutely possible to obtain funding, especially if you take these tips to heart. If you’re frustrated with your current situation or just want a fresh perspective, contact HMG Hospitality for an in-depth analysis.
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