How Hotel Owners Overcome Obstacles to Hotel Financing


NEW YORK — Inflationary pressures and rising interest rates are making the recovery more difficult for U.S. hoteliers, but there’s still room for them to strike deals.

During the “Financing – The Capital Stack” panel at the ALIS Summer Update 2022 conference in New York, hospitality industry and loan officers spoke about the state of hotel finance and what owners and developers need to keep in mind when working on agreements and new projects.

There has been a lot of volatility in the market, but the deals are continuing, said Kyle Berman, vice president of KSL Capital Partners. These transactions typically involve higher quality assets with limited capital expenditure needs, strong performance during the pandemic and strong cash flow profiles. Borrowers also typically have significant hospitality experience and a strong track record.

Lenders favored leisure-oriented properties with higher demand, he said. Conversely, properties in more urban markets that are in the early stages of recovery and require more capital spending have had a harder time obtaining financing.

“Something that we’ve seen in the market over the last few months in markets like San Francisco, offers that maybe someone was looking to buy something a few months ago and locked up a property at a certain price , that price no longer reflects current market conditions, and in some scenarios these types of deals collapse,” Berman said.

Doing deals in the hospitality industry is all about looking to the horizon and participating in it for the long haul, said Chris Ropko, CEO of McNeill Investment Group. Find a good deal and run the capital stack, but nothing lasts forever, he said. Owners can step out of the capital pile, but that just means being thoughtful.

If an owner is forced, that means they may have to take a break, he said.

“Several people have said that prices haven’t corrected enough to make positive leverage attractive enough to drive out some of the trades we see there,” Ropko said. “On the other hand, if you have flexibility with your capital, your sources of equity, migrate up and down the capital structure.”

If a buyer wants a hotel priced at $150,000 per key but still can’t buy it, the buyer must provide leverage of $150,000 per key on return, he said.

Potential developers need to look at the horizon of a market and ask themselves what their strategy is, said Sanat Patel, co-founder and chief loan officer at Avana Capital. This may involve building, stabilizing the property and then reselling it. It could be built, stabilized, put on the balance sheet, and then “ride the cash flow bandwagon,” he said.

“Developers need to ask this question first,” he said. “That’s what I mean when I ask, ‘What’s your strategy with that?’ Then you can adjust your capital stack accordingly.

CHMWarnick Senior Vice President Mark VanStekelenburg said his company is seeing more and more mixed-use or masterplan developments starting to come back, and they are moving full steam ahead. The hotel component represents only about 10% of the total product. If these types of projects can add sports or entertainment to the mix, that’s an even better product.

These projects rely on continued synergy, he said. Each element may not work alone, but it works when combined with these other asset classes.

Patel agreed, adding that “each asset must complement each other so that they can drive demand for each other.”

From an underwriting perspective, lenders need to know where new hoteliers are coming from, Patel said. Hoteliers must have reserves on hand, as hotels are an operating business and management generates cash to pay debt. Hoteliers without reserves will face challenges when trying to borrow.

They should look at existing demand in a market, new construction in the area and the demographics of those entering and leaving, he said. California lost a lot of business because of its tax structure, and those businesses went to places like Phoenix and similar markets.

Lenders look at all of these different factors when considering an investment, Patel said.

“Over the past five years, we’ve seen a lot of guys come in because, ‘Oh, it’s sexy to own a hotel,'” he said. “It’s not sexy anymore after COVID, trust me.”

New hoteliers need to view this as an operational business and understand the cash flow aspect, Patel said. Without cash flow, owners must be prepared to invest money in the hotel and determine at what level, because the more of their own money they invest in it, the higher the return they want.

Homeowners looking to refinance should anticipate rising interest rates as much and as soon as they can, Berman said. Those with an upcoming loan due date should speak to their current lender as soon as possible. Figuring out if they could extend their loan is probably the first step, he said.

Regardless of the process, it’s usually best for homeowners to work with a lender they’ve worked with before, he said.

“Doing a new contract with a lender you’ve never worked with before is just going to make it even more difficult,” he said.

When working with owners looking to sell an asset, VanStekelenburg tells them they need to have a track record if they don’t have significant cash flow. If their market is on track to regain occupancy this year and occupancy next year, they better be at 100% or more of their competitive set.

Everyone continues to struggle in the full-service and big-box hotel segments during the proportional reopening with continued strong demand, he said. With big box hotels, they can reopen their restaurants to test demand. There should be key elements like breakfast, but full-service hotels and boutique hotels should lead the way by testing this space.

On the acquisition side, it’s about getting the expertise, either in-house or through partnerships, VanStekelenburg said. For those who expand, they must develop the hotel as a purpose-built hotel from the start.

“A lot of these new entrants are bringing in non-hotel architects, not enough people familiar with that,” he said. “This kind of problem can be a monstrous expense, if ever recoverable.”

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