PHILADELPHIA—The independent hotel segment in the United States has come a long way during the past few decades, but don’t expect to convince your lender. Generally speaking, securing financing for an independent hotel is still much more difficult than for a brand of similar quality.
That said, there are steps owners and developers can take to increase their likelihood of securing a loan, according to speakers last month during a session titled “Lodging capital market” at the inaugural Independent Lodging Congress held at The Rittenhouse in Philadelphia.
“Even when you’re purchasing hotels in high-barriers-to-entry markets and so on, in general the lending community, just by the nature of being a lender, is typically conservative. You have to go through a lot of hoops to prove up why what you’ve underwritten … will actually work or not,” said Erik Warner, principal at Eagle Point Hotel Partners LLC.
Warner and his fellow panelists shared nine tips during the 60-minute session:
1. Pick the right market
At their core, hotels are still a real estate play. As such, the old adage still rings true: location, location, location.
Some markets don’t need a brand flag to get off the ground, Warner said. “You probably don’t need to be a Marriott” if you’re in New York, he said.
Jim Alderman, senior VP of acquisitions and development for Kimpton Hotel & Restaurant Group, said there are four to seven markets of similar caliber, such as Waikiki in Hawaii.
That’s not to say independent hotels don’t get financing elsewhere, especially if the borrower has an existing relationship with a local lender, said Matthew Livian, senior VP and chief investment officer at the Sydell Group Limited.
2. Change your star expectations
If owners want to stray from top, urban gateways, they need to change their product profiles, Alderman said.
“It seems like the future of boutique, independent hotels, at least in this country, is going to go a little in the direction of what it is outside of this country; there are only so many places where we can go 4-star. … It needs to be approachable,” he said.
Instead of developing upscale independent hotels for $300,000 a key, developers would be wise to scale down their expectations to 3 stars at $200,000 to $100,000 a key, Alderman explained.
College towns could make perfect candidates for this more restrained approach to independent development, he said.
3. Underwrite as if it were branded
“Underwrite your deal as if it was a branded hotel, put all the fees in there that a branded hotel will have. That’s something your lender’s going to do anyway,” Warner said.
Lenders like a conservative model, so don’t assume you’ll save X basis points by not affiliating with a brand, he said.
“If (the underwriting) still works, that’s the way the lender will look at it,” he said.
4. Don’t count out EB-5
For owners looking for money on the cheap, EB-5 financing, in which foreign investors invest $1 million in a commercial enterprise in exchange for a green card, is one viable alternative, Livian said.
Livian and the Sydell team turned to EB-5 financing to help fund the renovation of a 400-room project in Los Angeles.
“The scary thing about EB-5 is the investors and the agents over there have very little ability to know which projects are strong and which projects aren’t …” he said. “But the upside is it’s very cheap financing.”
At least one panelist said he would never use EB-5. “We’re a ‘no’ in that column for EB-5. … It just doesn’t feel right,” said John Rosen, managing director of Rockbridge.
5. Find strong partners
A strong team—on both the development and management side—can mitigate a lot of the risk associated with independent projects, Alderman said.
“For ground-up capital for a boutique hotel outside of the top four, maybe seven (U.S. markets), good luck. I don’t see it. If someone’s going to loan on it, it’s got to be somebody who really knows what they’re doing … because that’s a lot of risk,” he said.
6. Stick to the known
“Financing new ideas that are unproven are always going to be difficult,” Livian said.
Independent hotels can be unfamiliar enough, he said. Throw in some new twists or additions, and finding the necessary financing to get the project off the ground will be even more difficult.
7. Bolster your distribution system
Brands bring distribution clout. For independent owners to ease the concerns of lenders, they must have a strong distribution plan in place, Warner said.
That could mean affiliating with a soft brand, such as The Leading Hotels of the World or Small Luxury Hotels of the World, or simply hiring a management team with a strong track record of proven distribution management at other independent hotels.
“It really does come down to the distribution system and how powerful the distribution system is. … That’s what the lender is going to look at,” Warner said.
8. Take risk out of the equation
“If you’re trying to sell a new concept to an equity investor or a lender, the single most important thing you can do is try to package it as much as you can where you’ve de-risked all the things you can possibly de-risk,” Livian said.
Have your management agreements signed, your equity in place, the restaurants leased—anything you can to resolve any lingering questions about the viability of the project, he said.
“Take all the risk factors you possibly can out of the equation,” he said.
9. Bring your wallet
If all else fails, be prepared to bring your wallet, the panelists agreed. The more equity you are willing to put into the deal, the more likely lenders will fill the remaining gaps with debt financing.