Attracting debt to finance a hotel is a subject that receives increasing attention from our clients at GSO Hotel Capital. Along the ever-present search for equity partners by many hotel owners and developers, debt is always part of the total package. This article aims to zoom in on the landscape of debt options we see in the world today for our hotel clients.

Hotels have traditionally been financed by local banks where owners typically hold a long-term relationship. In a lot of cases, this is how we would recommend most of our hotel owning clients to finance their single hotel assets, or perhaps a set of hotel assets. Banks do tend to compete best with lowest rates compared to alternative lenders. However, it is not always possible to get debt from a regular local bank as a hotel owner. One common complication we find is that banks might (temporarily) want to reduce their balance sheet when it comes to hotels, or commercial real estate for that matter. They may be overweight in that asset class and close the door on hotels for a while. Another hurdle tends to be that the bank may not ‘like’ the particular business case of the hotel that’s intended to be financed. Typically, banks do not have much appetite for hotel developments, massive renovations or other such ‘uncertain’ territory. Another reason for a turn down from a bank may be that the hotel asset is located in another country where they may not have the legal framework or mandate to execute deals. Lastly a common complaint among our clients involves the lengthiness of bank closing times for deals, although this differs case by case.

That is where the alternative lenders tend to come in. They move quickly and fill in the gaps. However perhaps the word ‘alternative’ may not be so relevant anymore. There is a massive active market of such lenders available if you’re willing to look. These come in the form of private debt funds, bridge lenders, mezzanine lenders and many other such types. Those that understand the hospitality asset class in detail are typically the ones that are able to look beyond their own country borders with a broader perspective. In this realm of players, we find much more sophistication than in traditional lenders when it comes to hotel knowledge and deal structuring capacity, albeit at a price. In a typical saying “if you want good and cheap, it cannot be fast; if you want good and fast, it cannot be cheap; and if you want fast and cheap, it cannot be good”. You pay what you get, basically.

There are a few parameters to consider when analyzing your hotel’s debt potential, whether knocking on traditional or alternative doors. First is always the LTV, or loan to value, which for an existing and successfully operating hotel can be as high as 85% (although the interest rate hike has suppressed that overall, due to increasing debt service as a result). For value-add opportunities we typically see LTV (or LTC) values of up to 65% and for development projects it tends to be a maximum LTC of 60%. These are average rules of thumb. An obvious standard is that the higher the LTV, the higher the interest rates are. A good running stable hotel from a well-established operator in a great location with a maximum 50% LTV requirement for senior debt may be charged as little interest as 4-6% on an annual basis, perhaps even without amortization. A development project from a relatively new developer in a more exotic location with an LTC of say 85% might however be looking at rates in high teens if not more, with a cash sweep, other asset pledges and perhaps more such guarantees required to even get the deal done. And of course, within those extremes there are many other flavors of loans and terms.

The bottom line is that even when considering financing a hotel portfolio, each individual asset is a unique business case in itself. The way lenders look at the opportunities are a combination of the asset development stage, income and guarantees, the lender and his track record, the location and attractiveness of the asset, perhaps even the ability to convert the asset (temporarily – think of COVID times), the value of the asset (always have a professional valuation done because this is pretty much the first document any lender requires), the potential exit (i.e. refinance, sale, or other exits). Especially a bridge financier would want to know your exit plan once the loan is used up in circa 2 years’ time and the asset is being developed. In some cases, lenders have the capacity to refinance such loans themselves. They would need to be sophisticated enough to hold various ‘buckets’ within their fund, for various risk appetites. They may accept to move up the risk ladder from senior to mezzanine for a premium after an agreed period, if your capital structure so requires. Structuring hotel finance in that way becomes almost an admirable art.

Whatever the capital need is, it requires a level of dedication and knowledge on the part of the advisor, along with the right industry contacts. GSO Hotel Capital delivers just that. We continuously arrange debt financing for our hotel clients across the globe and across all stages of development. If you think we are a good fit for your capital searches, don’t hesitate to reach out to us for an introductory call to see where we can help.

Writer: Anna-Larisa Snijders

#HotelRealEstate #InvestmentOpportunities #CommercialProperty #HospitalityInvestment #RealEstateDeals #BoutiqueHotels #LuxuryResorts #PropertyListings #InvestmentConsultancy #HotelIndustryInsights

Hotel and land owners have a lot of choices to make once they have decided to (partially) sell their business or raise capital for it. If any market has numerous flavors in transaction structures, it is most certainly the hotel real estate market. It is easy to get lost in the land of endless possibilities of raising hotel real estate capital and it’s just as easy to underestimate its complexity as well. Simply listing a hotel property ‘online’ does not mean you will hit a successful sale, let alone give you the best value as the owner or save you from a lengthy and headache-free process for that matter. This article intends to break down the various options and their typical pros and cons based on our experience at GSO Hotel Capital, a boutique placement company in international hotel real estate.

If you are an owner of a hotel business, property or land and you are seeking capital, then there are some choices to make in what exactly you are selling. The first thing to determine is the stage your hotel is in, which is typically defined as:

1. Development (new construction)
2. Value add (some enhancement work needed)
3. Existing (up and running hotel)

The following capital raising scenarios are the most common for hotel projects across the above stages.

1. Sell a plot of land “as is”, with or without a hotel permit. If you own a plot of land that could be a potential for a hotel development but doesn’t have a permit for it yet, then your chances of selling it will likely be quite slim. There is a lot of hotel dry powder in the market, but the permitting risk is not typically part of most investors’ mandate. There is a large uncertainty involved when permit processes need to be done, especially in countries that have a reputation for inefficient bureaucratic processes or even hotel restriction policies that complicate permit processes.

If you did take on that planning risk by getting a hotel permit, then you’re in a more comfortable selling position. A buyer could be a hospitality operating company with their own investors or outside investors involved, having the development capability in-house or outsourced. Otherwise it could simply be a development manager that forward funds the property once they sourced a tenant directly. In other cases, a hotel investment fund with an appetite for development could be interested in buying, while sourcing the developer and operator within their own network. And finally, you might have luck selling to a speculating land trader, and end up seeing your site listed for a higher price within a short timeframe after that. Either way, your selling success rate will always depend on the location of the site, its value potential within its competitive landscape and of course realistic pricing. It is advisable to engage a hospitality expert in determining the right market price.

2. Selling a hotel development opportunity turnkey, i.e. you are the owner and developer which means you take full control of the permitting and construction process and perhaps also the operator search, unless you find buyers who will likely prefer to operate it themselves. You can offer the property turnkey on a forward funding basis, which means there is an investor willing to commit a certain price by a certain delivery time for a certain rental yield. Otherwise you can source a buyer more closer to the delivery date, when the tangible progress of your development can be shown for. Either way, this strategy exposes you to a certain number of risks that involve construction quality and pricing, land or soil issues, infrastructure dependencies, contractor or design issues and more.

 

3. A third potential structure is to sell an ownership stake in either the land or the entire development project. In that case you are looking for a partnership, so it has to be a comfortable fit. Ideally you find a partner that is familiar with the country you are developing in. Typical partnership structures involve a revenue sharing model where a clear win-win is created. This can easily be applied to value-add situations and in fact is a quite common model for hotel owners, i.e. ‘sponsors’ to partner up with the right equity partner that also brings the necessary knowledge and network to the table for the value enhancements that the property needs, whether it is a renovation, extension of rooms, an operator change, booking system change or other value enhancement; the right partner could make the difference in achieving maximum returns on your hotel. Just make sure that the exit is clearly defined for all parties involved.

 

4. If you do wish to keep the ownership in full control, but the operational management takes too much effort or it doesn’t fit your preference, you might choose to have the hotel property operated by a hotel operating company. Even within this structure, there are choices to make between fixed leases, management contracts or hybrid operating models with profit and loss sharing for both parties. Engaging a specialist such as GSO Hotel Capital to find the right operating partner that fits in terms of style, target market, designs and room sizes, but also in contractual terms and conditions, is highly recommendable.

 

 

5. Whether your hotel is to be developed, improved or already up and running, you can always decide to own and also operate it fully yourself, but to outsource the branding. This is not necessarily a capital raising exercise, but it could certainly enhance the operational value of your hotel by tying up an international brand that brings in loyalty customers and recognition. Note that most brands have their requirements for room sizes/layouts, hotel segment and facilities as well as the location (i.e. beach access or city center), so it is important to find the right fit for the specific hotel. More specifically, finding the right brand within the competitive set of hotels around yours is crucial.

 

Within the options to keep ownership to yourself or combine it with a partner, there is always the potential added value of sourcing debt. Although debt does not come cheap anymore since 2023, there are still many ways to fund hotels and add value. When sourcing the debt, the critical differentiator in debt terms is the stage of the hotel, as defined above in Development, Value add or Existing. The earlier stage of development your hotel is in, the higher the debt rates typically are.

The landscape of debt providers in hospitality is quite diverse and has continuously been professionalizing over the years. Hospitality was traditionally not a very ‘bankable’ sector, mainly due to the lack of knowledge within banks about the operational details of the business. It is the most operationally focused real estate business, with rooms being sold every night and f&b being consumed throughout the day and night. Hospitality debt has long been perceived as a high inflation-linked product, with tourism fluctuating along inflation rates. And as we have seen since the aftermath of Covid, the worldwide hotel industry has shown impressive recovery rates. Numerous articles and studies have already been written about this subject, so for the purpose of capital raising, it is too much to cover here. The bottom line is that there is plenty of dry powder in the hotel debt markets as we speak; it’s just a matter of getting your foot through the right door with the right hotel opportunity. In the next article ‘How to Finance Hotels with Debt’ we will dive deeper into the workings of the debt capital markets in hospitality and the current trends we see at GSO Hotel Capital.

Writer: Anna-Larisa Snijders

#HotelRealEstate #InvestmentOpportunities #CommercialProperty #HospitalityInvestment #RealEstateDeals #BoutiqueHotels #LuxuryResorts #PropertyListings #InvestmentConsultancy #HotelIndustryInsights