— reprinted courtesy of Eastern Western Hotelier Magazine
GETTING THE DOLLARS YOU NEED TO GROW YOUR BUSINESS MEANS KNOWING WHO TO TALK TO
When you’re looking to finance a renovation, conversion, or new build, the logical step is to seek support from a lender — but it may not be a conventional bank.
U.S.-based Access Point Financial (APF) is an example of a specialty lender that provides financing to qualified franchisees of major hotel brands and independent boutique hotels in the U.S. and Canada.
“A specific and important distinction between conventional banks and non-bank lenders is that conventional banks, for the most part, will prefer assets which are stabilizing or stabilized at generally lower loan-to-value percentages than non-bank lenders,” says Dilip Petigara, CEO of APF. “Non-bank lenders will look at construction loans or value-add renovation loans because they are less focused on historical financials and more so on market opportunity and prospective performance following the opening of a new hotel, hotel renovation, or conversion of an existing hotel.”
Petigara adds that conventional banks serve a very important role in hospitality finance as they typically provide longer-term fixed-rate money at more advantageous interest rates.
“Non-bank lending platforms tailor the debt solution best for the individual borrower,” he says. “These platforms do not need to conform to conventional bank regulations — hospitality concentration limits, as an example — and provide more advantageous loan-to-cost and loan-to-value parameters, making the upfront equity requirement much less onerous on the borrower, while still offering flexibility.”
And it may net you a faster approval.
“We can close on the initial loan typically much faster than a conventional bank and, given our expertise, we can react to unknown variables that arise throughout the process,” says Petigara.
Financing types available for hoteliers include permanent financing for stabilized properties with strong operating performance, as well as loan options for transitional properties needing some sort of value-add component, such as a PIP, renovation, or conversion to another brand. FF&E financing to complete a PIP is another possibility and, if the economics make sense, 100 per cent financing for a renovation may be available.
“Lastly, construction financing is available for the right property in a strong market,” says Petigara, adding that these loans are more scrutinized due to the higher risk associated with new construction. “At APF, we will look at construction loans for Hilton, Marriott, Hyatt, and IHG hotels.” When underwriting a hotel loan and providing terms for financing, Petigara says it is first important to understand the property’s operating history: examining the previous 12 months, as well as the prior three to five years. Next, the property’s performance relative to its competitive set is reviewed, which requires a recent STR report.
“If the hotel is not performing as well as its competitors, we need to understand the hotel’s complete story and the reasons why,” says Petigara.
In addition to the historical operating statements and STR report, loans are based on proforma underwriting and a review of projections for one to five years.
“Lastly, we need to understand who the sponsors are, including the number of hotels they own, length of time in the industry, as well as their financial wherewithal,” says Petigara. “When working with a lender who specializes in hospitality finance, understanding where the hotel has been and where we think it can go is imperative to underwriting. We understand qualitative fundamentals and can typically help finance struggling hotels if we see a distinct plan for the future.”
LENDERS WITH HOSPITALITY EXPERTISE
Hospitality financing doesn’t mean you have to choose between a specialized financial services company and a conventional bank. Instead, it is a matter of talking to lenders who have expertise or knowledge in the hotel space — and that expertise may be available within a conventional bank.
CWB Franchise Financing has been lending in the Canadian hospitality and foodservice space for close to two decades. In 2016, it was purchased by Canadian Western Bank and now operates as a business unit within the bank.
“Oftentimes, there will be conventional banks with a unit such as us that specializes in that,” says Cam Woof, assistant vice-president, hotels and syndication, CWB Franchise Finance.
For CWB Franchise Finance, the focus is on the sponsor or ownership group behind the property — the depth and breadth of the ownership group and how many hotels they own or run.
“For us, it doesn’t ultimately matter whether [a property] is branded or not, although our primary focus is always on the sponsor, so who’s behind the hotel, who the owner is, the management and that piece. That’s most important for us,” says Woof. “It’s less so to do with the asset itself or even its location.”
Generally, he adds, most lenders, especially if they don’t have a specialized space for hospitality, are more comfortable with the franchised, branded hotel model. The reason for that? Oversight.
“Hotels require some kind of oversight, so if you have a franchise that’s essentially doing that for you as a lender, as the main stakeholder or investor, typically 60, 70 per cent of it is financed by a bank or can be,” says Woof. “That franchise is overseeing the conditions of the hotel, whether they might have certain standards and whether it’s consistent with all the other hotels within their system, as opposed to an independent hotel where a bank might not have that oversight.”
In the case of independent properties, Woof says, “It’ll be a much closer relationship between the ownership group and the lender because that information and that confidence in how they run that hotel would have to be a lot more.”
The experience of the ownership group is important. “A first-time hotelier in an independent space is obviously a lot riskier and not necessarily something our group would do,” says Woof. “Not to say that there aren’t lenders that would, but the risk profile would be significantly higher, so the interest rate would typically be higher, the amount of leverage available to them would be less, so they would expect a lot more equity into the project.”
Preparing a proposal depends on the situation: renovations and conversions of an existing hotel or a new build. If it’s an existing hotel, lenders will want accountant-prepared financial statements, including an income statement or profit and loss statement, as well as their capitals expenditures over the last few years, and then also their plans for the future — for example plans for renovations or major maintenance projects.
“That information is important to a lender, then also, how their hotel stacks up to the market,” says Woof. “Typically, we’ll look at market research or market trends, or FTR reports which are a competitive database of hotels in any specific market.”
The process for new builds is a little bit different, because there is no past financial information on the property.
“Usually a lender’s going to want to see a feasibility study, then the budget, maybe some quotes for contractors and how much it is going to cost,” says Woof.
Again, the focus is on the sponsor or ownership group. Another consideration when you are looking at getting financing for a hotel property is the future. Woof says a hotelier’s first step should be looking forward.
“That’ll dictate the kind of products and financing strategy or road that they might go down,” he says. “A hotelier might plan on selling the hotel in a couple years or they might plan on holding it for 20 or renovate it or convert it or whatever, and all of those things will have an impact on the types of financing or the best types of financing that might work for them.”
Wherever you hope that road will take you, it pays to start off on the right foot by talking to lenders who understand your business.