The good news is that a recovery in the lodging industry has made hotels attractive for investment. However, as a borrower, you need to know what seasoned lenders must check before financing your property:
They will bet on the team. When applying for a loan, the borrower must demonstrate knowledgeable ownership and management, who are experienced and passionate about the property and its customers.
Lenders will look for the viability of these issues:
- Visibility: Is the hotel visible from the highway?
- Proximity: How close is it to draws like an airport, businesses, or tourist attractions?
- Competition: Does demand exceed supply?
- Area demand: Is the population growing, stagnant, or shrinking?
Lenders will check your property data, as compared with other hotels in the franchise, using the following rules of thumb:
- Net operating income (NOI): Most properties operate at 28 to 40 percent NOI.
- Cap rate: Most properties fall in the 8 to 12 percent cap range, depending on their brand and age.
- Gross room revenue (GRR): Hospitality assets usually trade between 3x to 5x of GRR.
A strong brand greatly increases your hotel’s potential success in the following ways:
- Marketing: Major franchisors like Hilton and Marriott invest millions in advertising every year.
- Guests: Brand dictates whether the hotel will attract budget, business, leisure, or other guests. Determine if the targeted sector will be lucrative for this market.
- Amenities: Franchisors specify what amenities the hotel must have, which can affect construction and operating costs.
- Training: Franchisors provide guidance, helping to ensure franchisee success.
- Occupancy: Franchisors drive occupancy through reservations systems, online marketing, and loyalty programs.
As a borrower, it is imperative that you demonstrate the strength of your balance sheet:
- Post-closing liquidity: Hotel owners should have at least 5 percent loan balance in cash after closing to cover unexpected expenses or cash flow issues.
- Global cash flow: Borrowers should be able to cover their living expenses until the property is profitable.
- Personal financial management: Some lenders will also check how borrowers manage their own finances―it is likely indicative of how they will manage their business finances.
ABOUT THE AUTHOR
Sundip Patel is the founder and CEO of AVANA Capital, a nationwide commercial real estate lender based in Glendale, Arizona. AVANA offers hotel financing through conventional and SBA 504 lending programs for acquisition, refinance and construction. AVANA also provides interim and bridge loans. Since its founding in 2002, the company has funded more than $ 1 billion in loans.