Creative Approaches to Hotel Financing

Hotel financing is getting easier to come by in today’s recovering economic climate, but that hasn’t stopped many developers from taking creative approaches to funding their projects. “The landscape is radically different than it was at the peak of the markets in 2007, when lending was really promiscuous,” says Bruce Batkin, CEO and co-founder of the New York-based Terra Capital Partners, of financing as of late. Batkin has handled approximately $5 billion in acquisitions over his 30-year career.

Being heavily asset driven is something that Batkin has used creatively. He cites a recent project his firm completed in Manhattan that received about half of its funding from the bank. He says being able to show the bank his prior real estate success was a bonus. “The bricks and mortar were good quality, the location was good, and it had a good track record,” he says. “The loan was conservative relative to the value of the property.”

That’s been the case with many bank loans. Unlike office buildings and retail centers, hotels release their tenants every 24 hours, which means they can’t be measured according to lease terms and rental rates—the normal variables lenders use to gauge the performance of a commercial property. Without these standard benchmarks, banks and other public lending institutions need to actually understand how a hotel operates in order to evaluate cash flows and accurately forecast performance—at least enough to determine how much debt a property can support. More often than not, debt estimates are modest.

Hence the need for equity firms like Batkin’s, which he describes as a “flexible lender” that often closes deals in as little as two weeks. “I like where lodging is at this point in time,” Batkin says. “We’re able to finance assets that are well below reproduction cost and we’re able to help borrowers finance discounted payoffs of their existing mortgage debt.” Batkin says in some cases, lending institutions are willing to take a significant writeoff for a good quality borrower that’s able to step up quickly and close on the deal, thus helping a number of developers who are in good financial standing.

In addition to private equity, developers can also partner with their local municipalities to firm up their capital structure. “When the equity dollars don’t make sense, it’s helpful to have some sort of municipal participation,” says Lisa Sexton, director of ORIX Corporation in Dallas, Texas. “That can take many forms, including upfront cash subsidies or debt service guarantees or even a rebate of site-specific taxes. I think any of those three things can be extremely helpful.”

When it comes to financing, Sexton says ORIX can provide the entire loan, such as it did recently with a 319-room dual-brand development that will be built in Redondo Beach, Calif. Three years ago, the city approved the $59 million project that will include a Residence Inn by Marriott and a Hilton Garden Inn, offering to provide financial support and debt servicing through tax funds generated by two hotels. “I think it’s an easier route to take,” Sexton says. “From our perspective, we have a strong background in municipals, and we’re willing to give a borrower more credit for some type of municipal money than someone who doesn’t fully understand would.”

Overall, Sexton says in many cases it’s not easy to work with a local government because you have to go through a number of approvals. But oftentimes it means the difference between a project getting done and not getting done.

Still others believe old-fashioned banking ways are still viable—with help from the federal government. “If you have a good track record and good history sometimes it doesn’t matter,” says Rodger Forni, co-founder and CEO of Pacific Inns in Portland. In his four-decade career, he’s developed more than 120 hotels. In addition, he manages more than a dozen hotels for other owners and investment groups.

Forni says owners of many franchise properties are not looking to rehab older buildings; they’d rather build something new. “If people are looking to build an 80-unit hotel and they don’t have $2.5 million sitting around it’s going to be very difficult,” he says, because borrowers still need to have sufficient collateral and work with a reputable financing firm.

He cites the 504 Loan from the U.S. Small Business Administration as one of the best alternatives. The program is good for hotel construction because the primary functions of the loan are land acquisition, construction, and renovation. “It’s a very viable option,” Forni says. “There’s been a lot of uncertainty in this economy, but there are still a lot of great locations out there that make sense.”