NEW YORK CITY—More lenders are looking into the boutique space than ever before, but that doesn’t mean there’s a lender for every project.
Those projects that get off the ground are carefully vetted, with solid business plans and sponsors in place, among other necessities, according to panelists at the recent Boutique Hotel Investment Conference, hosted by the Boutique & Lifestyle Lodging Association.
Here’s specifically what lenders are looking for:
1. A strong track record
“The biggest thing is the credibility and track record,” said David Gutstadt, management director of hospitality at Related/Equinox.
Related didn’t hand back any keys during the downturn. That track paid off as the company sought financing for new projects during the up cycle, he said.
“People know through thick and thin we’re going to get our projects complete,” he said.
2. A strong sponsor
For those without years of experience or an existing relationship under their belts, a strong sponsor backing them up is crucial, said Glyn Aeppel, president and CEO of Glencove Capital.
That’s especially true as the group pursues projects in tertiary markets where even branded hotels are few and far between, and an accurate comp set with other independents is a near impossibility.
“You’ve got no comps in that market, so suddenly the sponsor becomes critical in terms of who is actually behind this deal. … Who’s actually putting this together?” Aeppel said.
3. Recourse
One of the first questions Jared Kelso at lender Cushman & Wakefield asks is about the willingness of the sponsor to put up either principal or partial recourse.
Neither Gutstadt nor Aeppel said they’ve been on the hook for completion guarantees, however. Bad-boy carve-outs, yes. But guarantees, if there even are any, burn off upon completion of the project.
4. The right size
Another key question for Kelso: How big is the hotel?
“Our feeling is bigger is better in this market,” he said, based on his firm’s experience as well as the viability of 4-star, boutique hotels in this bullish market.
A boutique with 10 or 20 or 50 rooms? Not very interesting, Kelso said. A project with 100 or 200 or 300 rooms? That’s more in his wheelhouse.
5. A good business plan
“We get calls from sponsors who don’t have business plans all the time,” Kelso said.
While boutique projects often are the brainchildren of creativity, that does not mean plans can be drawn on napkins with nary a detail scribbled in the margins, he said.
“We gently suggest that more time is spent on understanding who their customer is and whether or not they exist in the market. Building a good bar is no longer a recipe for success in and of itself. You’ve got to have everything,” Kelso said.
Gutstadt said more details always trump fewer details. That includes securing bids for nearly every trade, material cost and estimates for fees and permits, he said.
“We don’t go out for financing until we have jobs fully bid with 100% (contract details),” he said.
Comps are another big component of that plan. So what happens if a market is devoid of comparable boutiques or independents?
“The world’s a big place,” Kelso said. “There’s always comps out there. … There’s almost always a comparable city in the world. There’s almost always a comparable project. It takes times to find those comps, but I’d broaden the search.”