Unlock Your Hotel's Trapped Equity

We all know location, location, location is the key to hospitality success. Today, it’s just as likely to be timing, timing, timing.

Hotel values are growing, money is cheap, and we’re finally climbing out of the recession. Now is the time to unlock the equity trapped in your property.
According to Price Waterhouse Coopers, RevPAR was up 8.2 percent in 2011 and another 6.8 percent in 2012, with increases in ADR leading the way last year. Average daily rate grew by 4.1 percent, and PwC anticipates what it calls a “robust” growth of 5.9 percent this year, more than four-fifths of it from ADR.

Barring a financial calamity – it’s hard to define what makes up government fiscal policy, and the so-called sequester is looming – hospitality industry prospects are good. Which makes freeing up your equity so appealing.

For example, your hotel has a 50 percent loan to value ratio and you want to leverage it up to 75 percent. With a property valued at $10 million, that means you have $5 million in equity, a persuasive amount when approaching a lender. Sure, you have to prove to the lender that the equity is there. But once you do, the sailing should be clear. Everybody likes to bet on a winner.

There may be constraints. Many lenders will put restrictions on a loan, for example, demanding cash out be put to commercial use. The most likely applications are refurbishment, ff&e, expanding the hotel, or developing a new property. You can’t use the new money to send your kid to school, or buy a yacht or Maserati.

Naturally, unlocking trapped equity will happen more easily for hotel owners who have made it through the downturn, when lenders were particularly fearful of loosening their purse strings. Now that hotel value growth is expected to continue for some time – one analyst predicts a bull market through 2016 – those lender coffers are opening up, swelling debt availability.

Geography matters. So does tier. You have to make sure your product is the right fit for your market. But if you’ve made it through the hard times, which are receding in your rear view mirror, you’re likely to be in a great position.

Are there challenges and pitfalls? Sure, but they’re not complicated. The main one is timing. Even though hotel values are expected to rise for several years, the cost of money is sure to rise as well. So now’s the time to refresh, maybe even expand, your empire.

Timing is everything, after all, making the unlocking of trapped equity a no-brainer – but also a gamble. The risk is worth it, especially today.

Once you connect with a lender, do your refinance and unlock that trapped equity.  You’re probably not going to get much bang for your buck if you wait for another five years. Interest rates are likely to be higher and values are going to grow, but most likely not at the same level. Hotel values are not likely to rise as quickly in the next five years as they have in the last two or three.

So pick – and take – your shot now. There’s no risk other than missing an opportunity. Hotel cash flows are expected to improve near and long-term, and hotel values should rise, but the cost of money is predicted to go up as well.

With the timing so opportune, consider turning to a firm specializing in hospitality finance. Experts in hotel finance can help you understand your current market values, evaluate your cash flows and tell you whether now is the right time to make your move. You’ve probably been wondering whether that time is now. One thing for sure: There’s no better time to find out.

By Greg Morris