Hotels are a candidate for refinancing under several circumstances. You can typically refinance constructed property after it stabilizes at 90% to 100% of the RevPar index. Lenders also look at these metrics:
Limited Defferred Maintenance
Appropriate Levels of Reserves
Expenses vs Benchmarks
Maximized Cash Flow
In some cases, you can refinance hotel construction loans and commercial bridge loans with a min-perm loan and then a takeout loan. Alternatively, we can renegotiate an existing mortgage for better terms or cash out equity.
How Graco Commercial Capital Can Help
When securing hotel financing or hotel construction loans for our clients, Graco Commercial Capital uses its vast experience and understanding of hotel financing projects to match your hotel and hospitality project to one of our well funded private or institutional hotel capital sources.
This personalized service, mixed with our expert knowledge of policies, procedures, capital markets, and operator transactions, saves our clients time and resources while ensuring the project is funded in the most financially benefical way.
Types of Hotels
Hotels are facilities that offer short term lodging, although some offer long term leases or sale of some of their inventory as condominium apartments. Hotel buildings range from small structures with only a few rooms to elaborate complexes with multiple and extensive property.
Hotel rooms vary greatly in their quality, size and cost. Some offer little more than a mattress and running water, but most provide a variety of amenities from basic to ultra-premium. Most decent or better hotels offer a quality bed, airconditioning/heating , a dresser and other furniture, a bathroom and a television. Many hotel rooms offer kitchen facilities - a refrigerator, microwave oven, coffee maker and a sink.
High priced luxury hotels, offer richly decorated, spacious rooms and amentities like a swimming pool, lounges, bars and restaurants, childcare, in-room massage, room service, business centers, workout rooms, conference facilities, and even tennis courts and golf courses.
Some of the top hotels offer rooms with four figure daily rates, although at the opposite end of the spectrum you can find roadside motels charging less than $30 per night for bare-bones accommodations. However, some motels offer hourly rates for occasions when guests only require brief use of a room.
Other hotels, known as flop-houses, house both transients and long-term guests at cheap prices for minimal amentities - tiny rooms, shared bathrooms, and little or no cleaning service.
Flagged Vs Non-Flagged Hotels
Flagged hotels are brand name establishments. The parent hospitality corporation (i.e. "managed" hotels) or franchises own them directly. The flagged hotel market is dominated by names like Marriot, Hilton, Hyatt, Four Seasons, Radisson, CHoice, and Red Roof Inn.
Often, hotel companies carry several flagged brands that represent different trade offs between amenities and pricing. For example, Choice Hotels owns properties under all of these names:
Cambria Hotel & Suites
Suburban Extended Stay
Ascend Hotel Collection
These brands address several markets: budget, extended stay, business travel, and so forth. Financing for the construction and renovation of flagged hotels is usually supplied by the parent corporation. For hotel franchises, the franchisor usually provides franchise financing programs, but they may require the franchisee to satisfy certain operational and financial requirements.
Flagged hotels, especially ones with multiple brands, must guard against saturating a market and cannibalizing each other. For example, a Sleep Inn not far from an Econo-Lodge might steal customers from its corporate cousin, to the disadvantage of the parent company.
A non-flagged hotel is independently owned and operated. It can occupy any niche and location, but since it is not a member of a franchise, it must be financed externally.
Many non-flagged hotels are family owned. They may compete head to head with flagged hotels or may be situated in areas where few competitors exist. Non-flagged hotels do not benefit from the name recognition enjoyed by flagged properties, and thus often compete on price.
Franchise arrangements have special considerations. For example, when a franchisor works with a lender to provide hotel financing to a franchisee, the lender usually demands a "comfort letter" spelling out the lender's right to operate the hotel should the franchisee default on its loan.
The lender might sell the property, but they might want to operate the defaulted property (usually via a hotel management firm) under the flag name, which is an intangible but valuable asset. Comfort letters are usually uniform for each hotel brand.
Franchised Hotels vs Managed Hotels
Flagged hotels make sense when each property meets certain mandated standards of the brand. These brand manadates ensure that guests receive the same, uniform level of satisfaction at each property. Wheter the brand is managed or franchised, it is in everyone's best interests to maintain standards for prices, accommodations, and service.
Brand standard audits are commonly used to evaluate compliance to brand mandates. Hotels that repeatedly fail a brand standard audit face sanctions up to termination of the franchise agreement, removal of the brand, and exposure to damages resulting from a lawsuit. Managed hotels that fail an audit may undergo a change of management personnel.
A Note on Re-imaging
Re-imaging is a process in which a hotel is adapted to appeal to a different aduience. The process might be as simple as the adoption of new logos or as complex as the reconstruction of existing physical facilities.
Often, re-imaging is used to move a hotel upscale or to cement a particular perceptio of quality. Re-imaging a flagged hotel requires a marketing makeover of the brand. For independent, non flagged hotel requires a marketing makeover of the brand. For independent, non flagged hotels, re-imaging can mean adding amenities and boosting quality, as when a two-star hotel re-images itself as a three star hotel or even a four star hotel property.