Getting the money is the tough part today. In a typical case, an old-fashioned owner and operator owns an existing hotel that has $2MM in leverage from the original construction loan. The performance is stabilized, driving cash flows so effectively the value of the hotel rises to $6 million over 36 months. Then the owner-operator all of a sudden has $4 million of imbedded equity into this hotel. Then he – or she – refinances this stabilized hotel, leverages it, pulls out that $4 million in equity and reinvests it in the next project. Basically, that organic growth generates a lot of that equity. If owners-operators don’t have a hotel that’s providing it, typically they have to rely on friends and family.
That’s particularly true in limited- and focused-service. Larger equity groups come into play in larger, more institutionally based transactions. But new construction will remain problematic.
Soon, you’ll see lenders being more aggressive on existing assets, maybe even starting to put their toe into the construction markets. But right now, they’ve only got so much powder they’re using; it’s easier to invest your dollars on existing assets that have stabilized performance because the values are already there.
Banks are reactive, not proactive. And they’re more likely to finance commercial real estate like shopping malls and multifamily rental units. So don’t inflate your expectations. After you do due diligence on your property, consult with a hospitality financing expert to find the right relationship between your dreams, your needs and your ability to execute.
Between the two of you, you should be able to find the way to a reality check – and to the check you need to improve your property or expand your empire. The key is to be realistic. The boom times are coming, but they’re not here quite yet.