As industry colleagues approached us at NYU recently, inquiring about our recent portfolio transaction with the principals of the G6, it became evident that there is a growing misconception that one needs to be a billionaire to successfully finance your hotel.
Traditional banks prefer deeper pockets, so the thinking goes, and if you’re not breathing that rarified air, you’re either out of luck or looking at a slog with traditional lenders who are more focused on their own returns than understanding the specifics of the hospitality industry. Like Prince said, though, “I’m here to tell you — there’s something else.” In this case, let’s talk about private lending as an option and the reasons it makes sense for many hoteliers with smaller resources trying to get their deals across the finish line.
For whatever reason, many hoteliers are apprehensive when approaching private lenders, not fully understanding the role they play in the world of hotel financing. In reality, private lending simply fills the gap between traditional banks and private equity. While rates generally are higher, private lending offers many advantages for the cost. When provided by vetted lenders with a long-term history in the industry, the benefits far outweigh the costs.
Here are five positives to consider when weighing one’s funding options.
1. Expertise
The most obvious benefit of working with a private capital provider (aka “private lending” or “private credit”) focused exclusively on the hospitality industry comes from the expertise earned through specialization. This depth of knowledge grants private lenders a great deal more insight into everything from which market segments are performing best to which brands are the most profitable in each region, often with deep relationships with the owners, operators and brokers who are the most active in the spaces under consideration.
This is knowledge borrowers can use to help make their final decisions. Hotel expertise allows savvy lenders the ability to underwrite using both in-place performance and forward-looking pro formas, enabling swift, creative credit decisions for value-add and transitional assets.
2. Speed
A private lender focused exclusively on hospitality typically can provide speed to completion uncommon among other lending sources. Whereas it might take other lenders 45 to 60 days to finalize a deal, private lenders can close in as little as three weeks.
With pricing fluctuations on everything from building materials to labor costs, time is of the essence now more so than ever when attempting to finance and close deals. Particularly in today’s market, with prices subject to changing on a seemingly daily basis, being able to move quickly can mean the difference between a deal penciling in or not.
3. Complexity
Expert, industry-specific private lenders also are capable of and more inclined to transact on more complex deals, utilizing their hard-earned knowledge to see potential in a loan that a generalist might not. Traditional sources, unfamiliar with hotel dynamics, are often more comfortable in smaller, one-off transactions that require less risk and insight. Private lenders, by contrast, can see the value in larger deals, such as portfolios spread across strong markets with multiple demand generators, and are willing to finance accordingly. And these groups often have several team members with both equity and debt experience.
4. Flexibility
Additionally, private lending provides a flexibility not found in more traditional sources. Banks and private equity often utilize harsher penalties for selling a hotel earlier than initially planned or refinancing the property when a market opportunity arises as opposed to the stricter terms originally set. Private lenders can be more flexible and are not beholden to such constraints or regulation.
5. Up and down the cap stack
Private capital has the advantage of being able to be placed throughout the capital stack, from senior bridge loans to construction loans, mezzanine loans to preferred equity. This flexibility can ease the overall process, giving other capital sources more confidence when they see a private capital provider taking higher risk slices of the pie. In a SASB, for example, this can result in higher proceeds and tighter pricing in the more senior bond tranches, resulting in lower overall rates to the owner.
Hotel financing continues to evolve. While traditional sources will always exist, finding alternative routes can provide a wealth of resources beyond the immediate dollars themselves. From vast depths of industry knowledge to an ability to work more diligently and more intelligently, private credit, in particular hotel-specific private capital providers, offers a unique and compelling path forward to funding a hotel project.
Dana Tsakanikas is chief investment officer of Access Point Financial.
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