Like home buyers, hotel owners take out mortgages and other loans to buy or develop hotels. Leveraging your investment with a loan enables you to do a much larger project – like a hotel. Leverage – using debt to make your equity a smaller percentage of project cost -should give you a higher rate of return on your equity, although it carries additional risk.
Lending money is a business and companies make money by offering debt to hotel owners in a wide range of formats. As a prospective hotel owner, think of yourself as a desirable potential client for lenders. Various types of debt may be available to you and you may use more than one for your project.
Finding the right loan, or combination of debt, for your hotel takes a bit of research and some shopping. You can start gathering information early in the process of becoming a hotel owner and then return to your contacts when you are ready to delve into the specifics for your hotel. As you talk to lenders, you will get an understanding of the alternatives for your project.
- A variety of lenders are represented at hotel investment conferences. The conferences are also a good place to learn about which lenders are currently active in the market and the general terms offered.
- There are mortgage brokers specifically for hotels. In other cases, you can discuss your project directly with lenders.
- You can talk to your local banker and, if they are not in the business of lending to hotels, they may refer you to lenders who are.
- You can find SBA lenders with an online search or local referral.
Loan originators are the people at the bank you will talk to about your project. Their role is to bring good loan opportunities to the bank and to carry your application through the process. You should interview several loan originators with different lenders as part of your research. They will explain their step-by-step process to you and they will give you their loan terms. You can compare the terms offered by lenders (lay it out on a spreadsheet). This kind of comparison helps you identify which lenders it will be appropriate to approach and ultimately which lender will be best for your project.
As you look into lenders and decide what kind of debt to pursue, you will also put together your financing package. This is a document about your project that is used to introduce the opportunity to lenders. It is also the primary document used in underwriting. There is information about preparing financing packages on Fortuna’s Table and a separate post covering terminology.
Talking to your local banker
You will want a strong local banking relationship so you have a good banker to support the operation of your hotel. Your banker will work with you on working capital, lines of credit, payroll, daily deposits, and other aspects of the day-to-day operation of the hotel. For a bank, this is good consistent fee-generating business.
It makes sense to start with your current bank to understand what they have to offer you as a future hotel business owner. It also makes sense to talk to banks who work with your partners and equity investors as well as banks with locations near your hotel project. Not all bankers are created equal and the recommendations of other business people and hoteliers are valuable.
Virtually all banks offer services for the operating business, but each has competitive advantages. Some also offer construction loans or permanent or SBA financing. Some banks have a group that specializes in SBA loans and others don’t. Some banks do hotel lending including construction loans and others don’t.
If you are working with a local bank on a large loan, it is reasonable to expect them to want your operating business accounts as well. Those are a value you bring to the table.
Hotel investment conferences and other conferences
Lenders, equity investors and others interested in buying, selling or funding hotels come together at the four largest hotel investment conferences each year. AHLA’s America’s Lodging Investment Summit (ALIS), the Hunter Hotel Investment Conference, the Lodging Conference, and the NYU International Hospitality industry investment conferences are places to learn about the current debt market, understand current loan terms, network with lenders and start business relationships. The conferences include trade shows which are excellent opportunities to make connections and gather information about lenders, brokers, franchisers and management companies. Attendees have access to rosters of attendees and vendors to facilitate connecting. Other industry conferences also offer opportunities to source deals and identify financing.
ALIS is held annually, usually in January in Los Angeles. It includes sessions for new and aspiring hotel owners arranged with the International Society of Hospitality Consultants. It also has programming specifically to introduce lenders and borrowers including information from the lenders about the kinds of projects they finance. ALIS also presents regional short programs throughout the year.
Held in the Fall in Phoenix, The Lodging Conference is about networking. It includes “think tanks” and “deal connect” which are good opportunities to ask question and get involved.
The Hunter Conference is held in the Spring in Atlanta. It is designed for hotel owners and attracts many mid-market hoteliers who are building up portfolios from one to multiple hotels. Hunter Hotel Advisors, the namesake for the conference, is a hotel brokerage firm. This conference fosters connections between buyers, brokers, lenders, franchisers and others putting deals together.
Held in June in NYC, the NYU conference is the most formal and expensive of the investment conferences. It is oriented toward larger deals.
Meet the Money is a hotel finance and investment conference developed by JMBM’s Global Hospitality Group, attorneys. www.HotelLawyer.com Originally an annual event, instead it now provides programming throughout the year.
The Asian American Hotel Owners Association (AAHOA) hosts one of the largest industry conferences each year. In addition to programming, it has one of the largest trade shows in the industry with suppliers for renovations and operations as well as brokers, franchisers, management companies and lenders. The AAHOA conference is a resource for single property and small hotel owners as well as multi-hotel companies. AAHOA also provides programming at HX annually in New York City and at regional events.
In addition to attending the conferences, you can find recordings of conference sessions online. You can also find rosters of speakers on the conference websites and those are good leads.
Money brokers: Work with financing experts
You may choose to work with a mortgage broker who knows the ins-and-outs of the business and can help procure the best loan for your project. Mortgage brokers are independent consultants who use their expertise with hotel financing and relationships with hotel lenders to assist you in arranging financing. A good broker should:
- Know the market of lenders including companies you might not identify yourself and kinds of financing you might not have considered
- Search for the best packages and rates
- Work with you to plan your best capital stack
- Have an advantage in negotiating with lenders for better rates and terms and lower fees because they are knowledgeable about criteria and hurdles the lenders must meet
- Provide volume to lender that far exceeds your individual deal improving the rates and terms
- Steer you away from lenders who would offer onerous terms or not be viable prospects for you, saving you time and money
- Provide access to lenders who prefer to use brokers as gatekeepers
- Assist you in putting together a complete financing package saving you time and building your credibility with prospective lenders
- Answer questions and guide you through the process
If your hotel requires complex financing, a broker may be a good investment. For a standard small hotel deal or SBA financing, a broker may not be a good value.
Using a mortgage broker is not without risks. You need a broker who specializes in the kind of hotel you plan – a specialist in luxury international resorts would not be affordable or useful for a Holiday Inn project and vice versa. Brokers charge a fee and for some hotels, you may be able to navigate financing on your own. However, this also carries risks.
Research and interview prospective brokers. In choosing a broker, study the deals they have completed to see if they are comparable to yours, critically interview prior clients, and consider how you would benefit from this assistance. You will find that there are specialists with integrity and expertise to bring to your project.