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The lender choice: Finding the best financing partnership

There is no denying the significant momentum and optimism currently surrounding the hotel industry. The June 2015 report from PKF Hospitality Research expressed confidence the fundamentals would remain strong into the next two years. This energy and the positive forecast continue to drive investment from established hotel owners looking to make new acquisitions or renovations to existing hotels, which may have been put on the back burner during the recession. It also spurs interest, however, from new industry entrants seeking funding for acquisitions and conversion projects, with some of these investors looking for lenders that can work quickly to provide financing to better compete with cash buyers.

The positive forecast in turn also drives more lenders into the asset class, which produces more competition all the way around for owners, lenders and investors alike. The increased transaction volume for buyers and sellers and increased competition for assets between owners and investors requires one to consider factors other than the source of the money when seeking capital. Selecting the first lender that simply offers the “best terms” or lowest cost today is, arguably, not the best approach; the cyclical nature of the industry dictates that hotel owners should look to strategic lending partners to meet not only their short-term goals but also to help achieve their long-term objectives.

With today’s array of organizations offering financing for hotel owners and investors, what factors should be considered? In the past, especially for those looking to make a quick decision, it might have been easiest to evaluate the quantitative factors (e.g., rate, term, amortization, fees); today, there is a lot more to consider. Even for owners and investors who feel they must choose a lender expeditiously to remain competitive, it is wise to evaluate multiple options and choose the lender best suited to the owner’s business plan.

An investor or owner should also decide what, beyond funding, they desire from a lender. Industry expertise? A variety of lending products? Established credibility? For many, building a long-term relationship with a lender is an objective. More are seeing the value in developing a relationship with a lender that truly understands their particular business plan and helps them execute it by becoming a trusted source of funding for both immediate and future projects. If this is a goal, the new lenders jumping into the hotel arena today could just as easily pull back tomorrow, which is something to consider when evaluating current financing sources. It is important to distinguish between lenders that have a history of performance and are strong finance partners and those merely entering these transactions for earnings with objectives to then sell the loans to other parties.

In looking at the elements important to their businesses, hotel owners and investors should certainly do their homework and understand what various lenders — traditional and nontraditional — are offering. Specialized commercial lenders focus on businesses; depository lenders more often retain servicing rights and maintain relationships with their borrowers. However, when looking at these more traditional lenders, it is important to know whether they are restricted in the amount of capital they are able to fund to a particular region, market segment or asset class such as hospitality, and determine whether this could impact your financing needs immediately or down the line.

Specialty lenders focused solely on hospitality are often capable of closing loans extremely quickly as well as capitalizing on their ability to understand particular business goals. Therefore, projects often result in faster timelines, but also generate stronger long-term relationships with developers, sponsors and owners. Hospitality-centric lenders often have the unique ability to base funding decisions on projected profitability following a purchase or renovation — not just historical performance — opening the door for higher proceeds as well as a trusted and proven relationship. Additionally, some specialty lenders are approved or endorsed by franchisors or hospitality associations; this third-party validation often gives investors and owners peace of mind they are working with a credible, established organization.

The most important advice hotel owners and investors can heed in the midst of today’s ultra-competitive environment is to vet their sources of financing and build strategic partnerships. Those in this industry for the long haul should collaborate with lenders who share their dedication and will remain a partner regardless of their business’s ebbs and flows. There are more options for lending, and it is wise to explore them all. Yet in this exciting and viable time for the industry, it is crucial for owners and investors to ensure lenders are committed to serving their needs, rather than focused on capitalizing on the flourishing market and what they view as a short-term opportunity. First and foremost, they must shift their mindsets and look far beyond the quantitative to find a lender that has already withstood the challenges that economic and industry cycles bring and factor in the qualitative as well. There is no need to sacrifice credibility and experience to secure both timely funding and strong, lasting partnerships.

 Contributed by Dilip Petigara, COO, Access Point Financial

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