Hotel Investment - What Type Of Properties Get The Highest Leverage Financing?
If you are an experienced hotel operator, you will know that acquiring hotel assets can be quite challenging these days. REITS and private equity firms have a lot of cash burning a hole in their pockets and stay zeroed in on the hotel market. This is pushing the demand up for hotels and keeping prices high. The problem that is occurring is that the returns investors would like to get are being squeezed. The credit crunch is causing new loans to be valued at higher interest rates and lower loan to value. This translates to higher down payments and less cash to take home at the end of the year. This should push the price of hotels down eventually because Wall Street backed loans were readily available at 6% interest and even below to make even expensive hotel purchases cash flow out for the investor. Right now Wall Street is trying to figure out just what they want so it may take a few months for the market for those loans to settle and it will definitely not be as liberal as before.
You can still get high leverage loans such as 85% loan to value or 85% loan to cost on hotels, but you have to have the right product, the right owner, and the right lender. Large projects such as resort hotels or skyscraper hotels in Boston Harbor will not get this kind of financing because cash heavy companies such as a private equity or REIT are only looking to get their required return with minimal headache. They don’t want to worry that the property won’t meet the mortgage because they could have investments spread all over the country in all kinds of real estate markets. In addition, developments that large are not meant to be heavily leveraged. A 1,800 room hotel is not mean to be 80% occupancy. It should be profitable at 60%. Your mid-scale products such as Hampton Inn by Hilton or Holiday Inn Express by Intercontinental Hotel Group or select service product such as Courtyard by Marriott or Hilton Garden Inn by Hilton can get this type of financing. The loan amounts usually fall below $50 million dollars and have consistent track record of corporate clientele that keeps occupancy up high enough to service the debt.
In addition, the hotel franchisors have a history of being selective of the location and whom they allow to operate. Lenders know that if you got approved by them that you have experience and your location is deemed profitable. Most importantly, projects of this size are usually owned by companies that don’t mind the headache because they are not usually institutional investors. They want maximum returns are highly motivated to take care of their property. Lastly, smaller hotels have higher net operating incomes than full service hotels because luxury services don’t always get used, but add to the cost of operation.
So always monitor your capital structure to see how much debt you really want on hotels. Sometimes high leverage increases your cash on cash returns significantly. Sometimes, it’s more headache than you need. Either way, a good market study of your hotel can help you get higher returns.
Ameet Chagan is a licensed commercial real estate broker with first hand experience in owning income producing assets. He specializes in helping motivated entrepreneurs get commercial loans for their real estate acquisitions. His website is www.lionheartfinance.com
