Today's Hotelier - November 2017 - 48

LENDING

 4.5-MINUTE READING TIME

METRICS
efficiencies, remaining franchise term,
and costs to build, buy or renovate the
asset are all added into the mix.

Do you know
your numbers?

A closer look at the key metrics lenders use
to determine your maximum loan amount.
by RUSHI SHAH

U

SUALLY THE FIRST
question a hotel
owner will ask us
is, "What size loan
can I expect?" Nonrecourse, non-traditional loans through firms such as Wall
Street CMBS shops and life companies
allow you to hedge your future market
and rate risk, keep your personal balance sheet uncluttered and take cash
out for any purpose. In order to offer
up these attractive benefits, a lender
will examine key metrics to determine
the optimal combination of rate, term,
proceeds, reserve requirements and
cash out that will ensure your hotel's
cash flow can sufficiently cover the
debt service throughout the life of the
loan. Knowing your numbers upfront,
or working with an experienced intermediary who knows how to leverage
them in negotiations with the lender,
can improve your results.

NET CASH FLOW (NCF)
Net Cash Flow (NCF) - also known as
Net Operating Income or NOI - is the

NICOELNINO/SHUTTERSTOCK.COM

REVPAR INDEX

owner's net profit before paying for any
debt (i.e. interest and principal) or any
non-cash expenses (i.e. depreciation or
amortization). Used to determine both
the hotel's value and loan amount, NCF
is calculated by subtracting expenses
(including a typical 3 percent management fee) and any reserves (such as a
4 percent reserve for FF&E) from your
hotel's last 12 to 36 months of revenue.
For example, a 90-room Hampton Inn
located in a second or third tier market
with $3,000,000 in revenue should have
a NCF of about $1,050,000, or 35 percent
of revenue.
Typically, the higher your net-profit or
NCF, the higher your loan amount. This
metric is also an example of where an
experienced intermediary who knows
his or her way around a hotel P&L
can make an impact. Many one-time
expenses and capital expenditures are
often misallocated, and can be credited
back to improve your NOI. Even if two
properties have the same NCF, however, they may not qualify for the same
loan amount. Market conditions, flag,
property condition, location, operating

4 8  | NOVEMBER 2017 | TODAYSHOTELIER.COM

To determine how well your hotel is performing compared to its peers, lenders
multiply your hotel's average daily rate
by its percent occupancy and measure it
against your peer group's performance
on the STR report. Known as the RevPar
Index, lenders use this metric as a barometer of how well the hotel is managed, and
look for an index closer to 100 percent.
If your RevPar is lower than 100 percent, first confirm the competitive set is
valid as the wrong group of competitors
can sway your index scores up or down. A
RevPar Index lower than 100 percent isn't
always a deal-breaker, but warrants a
well-constructed explanation from your
intermediary before the deal gets presented to an investor's credit committee.

CAPITALIZATION RATES
To identify your hotel's value - or
the percent return an investor would
receive if someone bought the property
for cash  - lenders divide NOI by the
hotel's estimated value (based on sales
of comparable hotels in the same market) to arrive at a capitalization or cap
rate. The lower the cap rate, the higher
your hotel's value. The maximum LTV
allowed by the lender is applied to the
calculated value to determine the loan
amount. Cap rates in markets with few
trades can vary widely, so make sure
whomever represents you has the market knowledge to address any anomalies.
In the case of our example, based
on the market's past sales data, the
hotel should be valued at an 8 percent
cap rate and the estimated theoretical
value of the hotel for financing would
be $13,125,000.

DEBT YIELD &
LTV REQUIREMENTS
NOI is divided by the proposed
loan amount to determine what the


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Table of Contents for the Digital Edition of Today's Hotelier - November 2017

Letter From the Chairman
Letter From the President & CEO
The Perfect Storm for Hotel Owners
Design That Brings People Together
New Brands Design for a New Kind of Hotel Experience
Time for a Group Sales Tune Up
AAHOA Interview
Marketing
Technology
Small Business
Finances
HR
AAHOA @ Industry Events
AAHOA Founding Members
AAHOA Vendor Partners
Classifieds
Advertiser Index
Today's Hotelier - November 2017 - intro
Today's Hotelier - November 2017 - cover1
Today's Hotelier - November 2017 - cover2
Today's Hotelier - November 2017 - 3
Today's Hotelier - November 2017 - 4
Today's Hotelier - November 2017 - 5
Today's Hotelier - November 2017 - 6
Today's Hotelier - November 2017 - 7
Today's Hotelier - November 2017 - 8
Today's Hotelier - November 2017 - 9
Today's Hotelier - November 2017 - Letter From the Chairman
Today's Hotelier - November 2017 - 11
Today's Hotelier - November 2017 - Letter From the President & CEO
Today's Hotelier - November 2017 - 13
Today's Hotelier - November 2017 - 14
Today's Hotelier - November 2017 - 15
Today's Hotelier - November 2017 - 16
Today's Hotelier - November 2017 - 17
Today's Hotelier - November 2017 - 18
Today's Hotelier - November 2017 - 19
Today's Hotelier - November 2017 - The Perfect Storm for Hotel Owners
Today's Hotelier - November 2017 - 21
Today's Hotelier - November 2017 - 22
Today's Hotelier - November 2017 - 23
Today's Hotelier - November 2017 - Design That Brings People Together
Today's Hotelier - November 2017 - 25
Today's Hotelier - November 2017 - 26
Today's Hotelier - November 2017 - 27
Today's Hotelier - November 2017 - New Brands Design for a New Kind of Hotel Experience
Today's Hotelier - November 2017 - 29
Today's Hotelier - November 2017 - 30
Today's Hotelier - November 2017 - 31
Today's Hotelier - November 2017 - Time for a Group Sales Tune Up
Today's Hotelier - November 2017 - 33
Today's Hotelier - November 2017 - 34
Today's Hotelier - November 2017 - 35
Today's Hotelier - November 2017 - 36
Today's Hotelier - November 2017 - 37
Today's Hotelier - November 2017 - AAHOA Interview
Today's Hotelier - November 2017 - 39
Today's Hotelier - November 2017 - Marketing
Today's Hotelier - November 2017 - 41
Today's Hotelier - November 2017 - 42
Today's Hotelier - November 2017 - 43
Today's Hotelier - November 2017 - Technology
Today's Hotelier - November 2017 - 45
Today's Hotelier - November 2017 - Small Business
Today's Hotelier - November 2017 - 47
Today's Hotelier - November 2017 - 48
Today's Hotelier - November 2017 - 49
Today's Hotelier - November 2017 - 50
Today's Hotelier - November 2017 - 51
Today's Hotelier - November 2017 - Finances
Today's Hotelier - November 2017 - 53
Today's Hotelier - November 2017 - 54
Today's Hotelier - November 2017 - 55
Today's Hotelier - November 2017 - HR
Today's Hotelier - November 2017 - 57
Today's Hotelier - November 2017 - AAHOA @ Industry Events
Today's Hotelier - November 2017 - 59
Today's Hotelier - November 2017 - AAHOA Founding Members
Today's Hotelier - November 2017 - 61
Today's Hotelier - November 2017 - AAHOA Vendor Partners
Today's Hotelier - November 2017 - 63
Today's Hotelier - November 2017 - 64
Today's Hotelier - November 2017 - 65
Today's Hotelier - November 2017 - 66
Today's Hotelier - November 2017 - 67
Today's Hotelier - November 2017 - 68
Today's Hotelier - November 2017 - 69
Today's Hotelier - November 2017 - 70
Today's Hotelier - November 2017 - Classifieds
Today's Hotelier - November 2017 - 72
Today's Hotelier - November 2017 - 73
Today's Hotelier - November 2017 - 74
Today's Hotelier - November 2017 - 75
Today's Hotelier - November 2017 - 76
Today's Hotelier - November 2017 - 77
Today's Hotelier - November 2017 - 78
Today's Hotelier - November 2017 - 79
Today's Hotelier - November 2017 - 80
Today's Hotelier - November 2017 - Advertiser Index
Today's Hotelier - November 2017 - 82
Today's Hotelier - November 2017 - cover3
Today's Hotelier - November 2017 - cover4
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