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Finance planning MONEYCARE

FINANCING

Financing a hotel  is like financing any other commercial property. Lenders will take the usual things into consideration such as operating costs and income, as well as the overall condition of the property. Underwriters will also consider expected future growth and the overall risk of the investment (think back to market cap rates). Expect a lender to loan a maximum of 70 percent of the sales price, so you’ll need the other 30 percent either from a down payment or through owner-financing.

HOTEL APPRAISALS

The appraisal of a hotel can be even more sensitive and complex than an appraisal for a loan secured by more standard commercial real estate. The volatile nature of a hotel's income -- fluctuating sharply from week to week, month to month, and over the course of the business cycle -- gives an appraiser a canvas on which to paint almost any picture. And that picture may change substantially between the first discussion of the loan and its actual closing.

A hotel lender cannot accept appraisals blindly. More than for most forms of real estate, lenders must participate in, understand, and accept the assumptions, process and analysis that drive the appraisal.  The ultimate value estimate must be consistent with the lender's beliefs about income volatility, conservatism, and forecasts of demand for room-nights in the particular market niche where the hotel operates. Unprotected by long-term leases, the variables of demand -- crucial to determining income and hence value -- can change, quite literally, overnight.  
 

CONTROLLING THE LAND

Every mortgagee must control the land under and around the collateral real property. If a lender takes over a hotel after a borrower defaults, but does not control the land that the property requires to operate, the lender does not have a viable asset.

The lender's mortgage must cover not only the main hotel building, but also whatever other real estate the hotel needs to operate.  For example, if the hotel parking lot or valet parking service requires use of a neighbor's land, the borrower must mortgage whatever rights the neighbor has given the hotel operator regarding these arrangements. The same goes for an adjacent golf course, health club, or other amenity.

These issues arise most commonly at resort properties or in an integrated mixed-use development or commercial park.  In short, the lender must be certain that, in the event of foreclosure, it will control whatever real estate rights the hotel needs to continue to operate. If the borrower has not mortgaged those real estate rights, the lender cannot foreclose on them. If the borrower holds the pertinent real estate rights in a form that is anything less than full ownership, mortgaging them probably requires cooperation from third parties. Agreements to assure this cooperation must be in place at the loan closing to prevent surprises, problems, and expense later.