Now that spring has sprung, thoughts turn to baseball. It’s a time of hope, a time to get the ball rolling. It’s time to secure a hotel loan.
When it comes to putting together baseball teams and strategic partnerships, it is always wise to set up your team strategically to win the series. Having right players in the right position can make or break you.
Develop a solid strategy and stick to it. If your industry profile and target ROI are based on 65 percent leverage and you’re comfortable with that, stay with it even if 85 percent LTV is available. Weigh the cost of debt against the cost of equity – especially with debt so cheap these days.
Closing a deal often comes down to return analysis and ROI, or what your investors expect you to get. Sometimes the cost of debt might be a lot cheaper than the cost of equity. Say interest rates are as low as 3 percent; you’re better off leveraging the property instead of investing in it.
That’s the balancing act you have to put into play.
When debt is cheap like it is now, debt service is low, allowing you to take advantage of higher loan amounts. At the same time, lenders have grown more conservative, as have loan-to-value factors. Where LTV was 85 percent during the bubble years before the Great Recession hit, now it’s closer to 65 percent. Which means the developer has more skin in the game. Make that “has to have more skin in the game” – which is good.
Say your loan came due at 10 years and you had to refinance. Originally, LTV was 75 percent or 80 percent; now it’s 50 percent, so it’s easier to get refinancing. Money is more realistic than it used to be, and the lending community is back on the field.
Whether it’s the first inning or the ninth, keep your eye on the ball and make sure all members of your team are on the same page. Hope is great, but keeping your eyes on the prize is critical.
Author - Greg Morris