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6 tips to help finance an independent hotel
publication date: Aug 14, 2014
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author/source: Ed Watkins
Financing an independent hotel might prove more difficult than a chain property, but it’s not impossible. Similar criteria are used to get a loan for an independent project as for a branded hotel, sources said.
“There’s no question about the bias that exists in the lending community that favors the major chains,” said Alex Cabañas, president and CEO of Benchmark Hospitality International. “Unfortunately, there are a lot of lazy underwriters out there who assume without question that a major brand is less risky.”
Cabañas said Benchmark, which operates nearly 30 independent hotels and conference centers, has been able to source financing for more than 33 years by understanding what lenders require.
“We work very hard with developers to get in front of the right audience, focus on underwriting the location, product, business model and distribution needs first, and then the brand,” he said. “The bottom line is that a lender must be willing to work a little harder to learn that building your own independent hotel is no riskier than going with a known brand.”
 Cabañas is one of a group of executives participating in a series of virtual roundtables conducted by Hotel News Now via email. The executives were speakers at last year’s Independent Lodging Congress, which this year will be held 29-30 September in Philadelphia. This discussion focuses on financing issues for independent owners and operators. Last month, the group discussed sales and marketing topics. Future articles will look at other operational and marketing issues.1. Build a relationship
Relationship building is a key component in securing financing for an independent hotel project.
“It’s an arduous process, as many lending institutions won’t even consider financing an independent hotel,” said David Benton, GM of the Hotel Providence in Providence, Rhode Island. “Building long-term relationships with lenders, investing additional equity and offering personal guarantees can help move the needle.”
2. Provide proof
According to Andrew Benioff, managing partner of Llenrock Rock, a real estate advisory firm, owners of independent hotels need to prove why their projects deserve financing.
“If a hotel is deliberately independent—rather than independent because of the failure to attract a brand—it should already possess a number of advantages that can make it attractive to lenders,” he said. “But the hotel’s ownership must successfully demonstrate these advantages to prospective lenders. Independents must demonstrate their distinctiveness, their uniqueness within a given market, as well as the significant savings—10-12% of gross revenue—that comes from avoiding a franchise fee.”
3. Have a marketing plan in place
It’s also important, Benioff said, to show a clear and concise marketing plan to prospective lenders because there is no brand to oversee this marketing process.
“It’s true that many lenders assume branded hotels have an advantage over independents, but this is an old-fashioned attitude that doesn’t reflect recent changes in the market,” he said. “The Internet and technology have greatly leveled the playing field when it comes to marketing hotels, independent or branded. While branded hotels may boast a strong loyalty program, they face the disadvantage of brand-wide rate ceilings.
“Independents don’t have this problem, so it’s important that they demonstrate their potential rate growth to prospective lenders.”
4. Have the pieces in place
Borrowers need to have all elements of the project structure in place to get consideration for financing, said Jan deRoos, HVS professor of hotel finance and real estate at the Cornell University School of Hotel Administration.
“Some of these best practices include a track record of success, having an ‘A’ location within the market and having all the property rights matters sorted, including site plan, utilities, easements/encroachments, survey, title and environmental,” he said.
5. Identify a take-out party
DeRoos said if the developer plans to exit the deal upon the project completion, a best practice is have a take-out party identified prior to or with the development financing.
“This is a fundamental risk reducer for the development lender,” he said.
6. Leave no questions about quality
Separate construction and permanent loans are needed if the developer plans to hold the property for an extended period after opening, and each one presents specific challenges to the borrower.
“For the construction loan, the financial and execution strength of the borrower are of primary concern,” deRoos said. “The fundamental question is whether the developer can complete the project on time and on budget, including the (various) property rights matters. In addition, the presence of a permanent loan commitment is a pre-requisite to any construction loan.”
DeRoos said quality is the key component to secure a permanent loan: quality of the borrower, quality of the hotel’s market and location and quality of the hotel being developed.
“The most competitive terms are found for the most competitive projects,” he said. “A flaw in any of the underwriting metrics introduces risk into the process that is either priced or the loan is rejected.”
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