Hotel & Motel Management - August 2008 - (Page 12) On Finance H&MM August 2008 | HotelMotel.com www.HotelMotel.com/digital_edition Alternative financing options can help close the gap IN THE details Finding sources of capital Shorter-term junior financing Credit financing Sale-leasebacks By Jeff Wilder H&MM Columnist U ntil mid-2007, lenders had abundant cash to provide, and borrowers often were able to adequately access full first-mortgage debt of up to 80 percent loan-to-value. Then, with the various credit crises, institutional lenders pulled in their horns and borrowers were faced with loan offers that often represented just 50 percent to 65 percent LTV levels. While real interest rates remain favorable, the offered debt levels often leave too much of a gap between total project cost and the combination of equity and first mortgage debt, with the result being that insufficient capital is available and deals don’t get done. There are several financing options borrowers can consider to help “close the gap.” By way of illustration, if equity represents 25 percent of total project capital, and institutional first mortgage debt of 60 percent is available, a debtor may need 15 percent of additional capital to meet his or her needs. How do you find this money? First, shorter-term junior financing may be available through institutional or private lenders, often secured by the hotel’s furniture, fixtures and equipment. This requires relatively quick principal repayment, often about five years, so it tends to eat up a lot of operational cash flow. Also, the lender may require a first lien on FF&E and a personal guarantee of repay- ment; if the existing first mortgagee already has a prior lien on the FF&E, then this financing avenue becomes problematic unless it’s done with the same lender who has the first mortgage. Second, one might consider line-of-credit financing that has the advantage of not requiring giving a lien on specific assets to the lender. The contours of this financing option usually involve principal payback over three to five years, and the lender may provide an interest-only feature for 12 to 24 months. A third financing option that usually is not considered is a land or building sale-leaseback. For this column, I’ll stick to the land sale-leaseback vehicle, wherein the hotel owner ascribes a value to his or her land and agrees to sell it to a private investor that then makes a long-term ground lease deal with the hotelier. The advantages of this capital raising option are that (1) the hotelier never has to repay the principal received, so its annual carrying costs are lower for the freshly raised capital, (2) no personal guarantees are usually involved and (3) providing ownership to the land as an investment vehicle might be more appealing than making a loan to a certain class of private investors seeking long-term income streams. Here’s an example of how a land sale-leaseback might be structured. Say your hotel earns $1 million before debt service and the hotel project is valued at $10 million. In today’s difficult financing market, a first-mortgage lender is likely to provide a $5-million to $6-million loan with debt service ranging from $400,000 to $500,000. Assuming you’ve got $2.5 million of equity invested, you decide to raise cash by selling the land under the hotel and leasing it back, with the goal of generating an additional $2 million. The potential land buyer would look at the hotel’s oper- ational cash flow and likely offer to buy the land under the hotel as an investment vehicle and lease it back to you for up to 99 years. The passive land buyer’s goal would be to generate a minimum of 8 percent to 9 percent return on capital, plus future upsides based on gross sales or cost of living adjustments. Land buyers might well be those interested in doing tax-free exchanges, if they are selling their property and looking to reinvest the capital in a 1031 tax-deferred exchange. Or, the buyer might simply be a private investor looking to invest capital for either his personal account or a profit sharing/pension plan he is managing. hmm@questex.com Jeff Wilder is president of Wilder Ventures LLP, a New York Citybased asset management company, and an adjunct professor at New York University. E-mail him at jswilder1@aol.com. Franchise Law Proper regulations help protect guest, self IN THE details Franchisors set rules Reduce liability claims Regulate surveillance rules Focus on guest satisfaction Under Construction American Hotel Development Partners LLC broke ground on a Holiday Inn Express Inn & Suites project in Savannah, Ga. The $9-million, 88-room hotel is slated to open in Q1 2009. American Hotel Development Partners LLC will break ground on a $13.2million, 106-room Staybridge Suites Hotel at the St. Petersburg-Clearwater (Fla.) International Airport in August. The hotel will open in late 2009. John Q. Hammons is building an Embassy Suites Hotel and a convention center in Pleasant Grove, Utah, expected to open in fall 2009. John Q. Hammons Hotels & Resorts will manage the hotel. Compiled by Elaine Simon, esimon@questex.com By Mort Aronson H&MM Columnist ranchisors understandably are concerned with vicarious liability issues. As the “deep pocket,” the franchisor regularly encounters damage claims for franchisees causing damage or injury to a third person. In the process of implementing rules and regulations to minimize vicarious liability claims, franchisors need to perform a balancing act so they do not go overboard protecting themtal cameras, surveillance and reselves against such claims to cording of public areas in hotels the detriment of hotel guests. has been cited as an example At the same time, franchisees of where franchisors should be need to take ownerpromulgating specifship of their responsiic standards and reguRELATED COVERAGE: bilities to implement lations. Some franchiprocesses and procesees claim that such For more on dures and to maximize safety and security standards and reguoperations the safety and securilations can be helpPage 134 ty of the guest experiful in the appropriate ence, thereby reducing enforcement of lethe prospect of successful damgal claims as well as serving as age claims against the franchisee a deterrent to illegal, criminal and his or her franchisor. and/or inappropriate actions. Some franchisees have taken These franchisees further indithe position that franchisors pecate that the failure of franchiriodically are overly concerned sors to implement regulations with vicarious liability issues to with surveillance due to vicarithe detriment of franchisees and ous liability concerns has resulthotel guests. They claim they ed in significant inconsistencies are looking for leadership from in hotel operations throughout the franchisor and are critical of the U.S. franchisors for not implementThese criticisms of hotel ing appropriate standards and franchisors fail to take into acprocedures because of the francount the complexity of the ischisor’s focus on avoiding poten- sues. For hotel franchisors to tial vicarious liability claims. designate specific standards and The subject matter of digirequirements on the use, loca- tion and operation of digital cameras, as well as other surveillance measures, could prove inappropriate and ineffective at many hotel sites. More attention to this issue from franchisors is warranted, however. Further, I do agree that the primary objective of both franchisors and franchisees should be guest satisfaction and security, in spite of vicarious liability exposure. I believe this goal is achievable and that hotel franchisors and franchisees working together can achieve guest comfort and safety, while also giving appropriate consideration to vicarious liability sensitivities. hmm@questex.com Mort Aronson is counsel with the international law firm of Kilpatrick Stockton LLP, which is based in Atlanta. He also is an adjunct professor at Emory Law School. He can be reached at (404) 745-2414 or MAronson@ KilpatrickStockton.com. http://HotelMotel.com http://www.HotelMotel.com/digital_edition
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