Applying for any loan can be a stressful process, even for seasoned borrowers, and hotel financing is perhaps the most complex of all commercial real estate assets. Lenders have a number of requests come across their desks every day. How can borrowers know what will attract the lender and make their application stand out? What must borrowers do to put their best foot forward and come to the table ready to negotiate the most competitive loan for their needs?
Here are five things lenders wished every borrower knew:
Demonstrate forward thinking.
Demonstrate forward thinking with three- to five-year projections for the business plan.
Showing this kind of financial forethought is something the lender takes into consideration when evaluating the loan application. It reveals an applicant’s preparation and organization, as well as provides that applicant with a degree of control over the impression given to the lender. Lenders, regardless of their organization’s loan criteria, want to know if the property’s net income is sufficient to support the loan amount being requested. To allay any lender hesitation, it must be clear how extending credit carries minimal risk potential to help generate a positive ROI.
Provide answers instead of leaving room for assumptions.
Lenders make assumptions when the borrower doesn’t provide answers. Not including the aforementioned projections can sometimes lead the lender to make assumptions based on the borrower’s NOI statements. They may speculate the hotel’s occupancy, ADR, and projected five-year revenue, for instance. If the lender in question is not making assumptions, the alternative is putting a red flag on the borrower for not thinking forward.
Even when it’s possible or likely for the business to remain static, it is still critical to provide these types of projections as a demonstration that the future performance of this property has been considered. It’s always better to provide a sketch as opposed to a blank canvas. Specific to hotels without available historical performance, as in an acquisition or new construction project, it is a good idea for borrowers to provide the lender with evidence of profitability for similar hotels in their portfolio.
Data helps support the loan request.
The most accurate representation of financial strength should include data from business financial statements, tax returns, personal financial statements, debt schedules, and K-1s. Use these documents to provide support for things like Debt Service Coverage Ratio (DSCR) and Global Cash Flow (GCF). The DSCR will determine a borrower’s ability to make payments, basically determining if the property’s performance will support the debt. GCF combines total real estate cash flow and personal cash flow to assess the overall cash flow of a group of people or entities who own the property. This calculation ascertains if there is sufficient support to service the proposed debt should the property be unable to do so directly.
Broader market information adds depth to the borrower’s story.
Along with the DSCR and the GCF, borrowers can enhance their loan application by including information on the historical and projected performance of other hotels in the market or competitive set. This information supports and adds depth to the borrower’s story.
It’s not uncommon for competitive set hotels or the sub-market to be undergoing significant change. For example, a competitive set hotel that is being closed, losing or changing its flag, or has fallen into disrepair can be very significant to the subject hotel’s future performance. Even other new supply in a market can be viewed favorably as it will help drive higher market ADR. Also, if a major employer is entering the sub-market or a nearby highway or airport is undergoing expansion, this is important information to share and helps justify projected demand growth and, therefore, higher RevPAR.
Transparency earns respect, not rejection.
Don’t hide problems like past bankruptcies or failed businesses from lenders. Show an honest representation of financials, otherwise it may raise suspicion. The truth gives the lender a sense of risk factors that may influence the project, and allows the lender to determine what is in the best financial interest for the organization—and ultimately for the borrower.
Also, ensure there’s a clear indication of loan repayment. It’s important to weave through all communication a consistent theme: an intent to repay and have the loan perform well. Showing projections is the perfect way to prove there is a solid game plan and will make the lender feel more comfortable with investing in the project, something not to be taken lightly.
In summary, think like a lender, all of whom want to know the same things:
- When can the loan be repaid?
- Will cash flow of the property cover the loan amount and interest?
- Can the hotel survive financial setbacks?
- What is the ownership structure?
- Where is there growth potential within the property’s performance?
- How is this hotel differentiated from others in its competitive set?
- How will the project effectively be promoted and marketed?
The ideas presented here are not unnecessary legwork just to get a loan, but instead should be considered as useful tools for borrowers. Thinking forward provides benefits to both the borrower and the lender.