LAS VEGAS—Debt and equity financing is available and abundant, even for acquisition or development of boutique and lifestyle hotels, said panelists at the recent Boutique Lifestyle Leadership Symposium, sponsored by the Boutique & Lifestyle Lodging Association.
“Lenders—both balance sheet and (commercial mortgage-backed securities) lenders—are becoming more comfortable in this space,” said Richard Russo, senior VP of development for Morgans Hotel Group, during a panel titled “Finance forum.”
“They’ve become used to financing some of the differences in these hotels, such as the high food-and-beverage revenues associated with these properties,” he said.
Russo said Morgans, which operates boutique properties under the Delano, Mondrian and Hudson names, recently secured $450 million in financing for two of its properties.
In many cases, non-recourse financing is available for boutique projects, the panelists said.
“The appetite to finance is building, especially for hotels in high-compression, high-demand markets such as New York (City), San Francisco and West Hollywood (California),” said Dan MacDonnell, managing director and securities principal at Cushman & Wakefield Global Hospitality Group. “And non-recourse is not an issue in these markets. There are non-recourse deals available outside these markets, but you’ve got to pay up for that.”
Debt financing can be more difficult to obtain for out-of-the-ordinary projects, said Ramin Kolahi, principal at Lighthouse Investments.
“For hyper-boutique properties, it’s hard to get some lenders on the debt side to understand how you can make them value-added deals,” he said. “If you’re doing a property that’s different, it can be a challenge to walk through these conversations with lenders. It’s usually location, sponsorship and real estate that will get you to the finish line.”
Another hurdle can be finding financing partners with similar investment philosophies, Kolahi said.
“While it can be difficult getting attention (from equity partners) for a $7- (million) or $8-million deal, our challenge is that we want to be a long-term holder of assets,” he said. Lighthouse recently partnered to acquire the 37-room Palihouse in Santa Monica, California.
“This is the kind of hotel we want to hold for the long term,” he said. “Everyone I know who ever sold real estate in Santa Monica regretted it later.”
While financing is available, especially for acquisition transactions, the pipeline for deals isn’t as robust, Russo said.
“A lot of (real estate investment trusts) are easily able to access the public markets, but often it’s a struggle for them to find deals,” he said. “It’s especially difficult to find deals in which value creation is possible and which are trading at discounts to replacement costs.”
Construction financing
The panelists agreed new-construction financing is available but not as easily as money for acquisitions or refinancing.
“It’s absolutely open,” said David Gutstadt, managing director of hospitality for Related Companies, in describing the debt market for new-construction projects. He said his company recently received commitments for debt financing on $2 billion of mixed-use projects that include hotels.
Russo said the availability of new-development financing depends on the market.
“For projects in the Middle East, it’s fairly easy to raise equity,” he said. “In Florida, it’s more difficult, so developers are looking for new ways to raise money for development. One of those is through the condo-hotel model.”
Not just gateway markets
While boutique and lifestyle hotels, particularly independent properties, were once concentrated in global gateway cities, the panelists said properties in secondary markets are becoming easier to finance.
“Financing availability depends on which secondary market you’re looking at,” MacDonnell said. “Some, such as New Orleans and Portland (Oregon), are strong boutique markets. It often depends on the fundamentals of the market.”
Kolahi said his company prefers secondary locations in primary markets, which was one motivation for Lighthouse’s deal in Santa Monica, a secondary market in the Los Angeles area.
“We try to find where the growth is going and get in there before the big guys find it,” he said. “Markets with strong economic drivers are also attractive. A place like Austin (Texas) has technology, bio-tech and a big creative community.”
It might take additional work to convince lenders to finance boutique deals in non-gateway cities, the panelists said.
“You need to walk them through the story of the hotel and show them the demand generators and economic analysis of the market,” Kolahi said.
Demonstrating alternative strategies for the property in case problems arise is also important, Gutstadt of Related said.
“Lenders like a back-up plan,” he said. “Now, in many cases there is an escape hatch in which a hotel can affiliate with something like Autograph Collection or Curio (A Collection by Hilton).”