Hotel & Motel Management - November 3, 2008 - (Page 14)

14 On Finance IN THE details Consider triple net leases Provide proﬁt to buyer Responsibility shifts to tenant Reﬁnance under tenant lease H&MM November 3, 2008 | HotelMotel.com www.HotelMotel.com/digital_edition Leasing vs. selling during a credit crunch n years past, I’ve written about the advantages of using triple net leases for hotel acquisitions and divestitures. Now, when credit is tight and lenders are providing less capital, there’s probably no time like the present to consider it. For example, a hotel worth $10 million in today’s credit environment qualiﬁes for a $6- I By Jeff Wilder H&MM Columnist million loan, meaning a buyer may have to come up with 40-percent equity to close the deal. The purchaser, faced with the need to raise more equity from investors, must offer greater ownership and, quite possibly, a higher equity yield on invested capital to his co-venturers, further diluting the impetus to do a deal. Often, the buyer reduc- es the price to adjust for lower ﬁnancing levels and the inability to raise adequate equity capital. Then, the seller rejects the offer and a potential deal dies. So the question arises of whether there’s a need to introduce a lender into a deal. Often, property owners sell to reduce ﬁnancial risk and operational responsibility rather than max- imizing the cash from a sale. That end can be achieved by structuring a long-term triple net lease to the potential buyer, with the owner maintaining title to the property. Using the previous example, the hotel likely is valued at that level because its net proﬁt before debt service is in the $1-million range. While the buyer might only be able to attract a $6-million loan with a debt service in the $500,000 per year range, the owner could net lease the hotel business to the buyer for, say, $750,000 in annual rent, leaving $250,000 proﬁt to the operator. In a triple net lease, the tenant is responsible for all business obligations, including payment of real estate taxes and insurance. The owner’s sole obligation is to pay mortgage debt service from the lease rent proceeds. One might incorporate a clause, providing the tenant with a future opportunity to buy the real estate at a price negotiated today. Providing a business buyer with $250,000 per year in profit stream comes with a cost. The property owner will expect the tenant business buyer to purchase that cash ﬂow stream by paying an upfront sum that likely would be $1 million-$1.5 million. That cash payment is reasonable, as the tenant is most unlikely to default on his or her lease rent obligation to the landlord, having paid a substantial sum to purchase the business up front and with a nice cash-ﬂow cushion to its position. With the tenant’s lease in hand, the owner might elect to reﬁnance the property. Using our example, if a $6-million loan is available, the existing owner might accept it, using the proceeds to pay off, say, $5 million of existing debt and putting the net loan proceeds of $1 million in his/her pocket. And, loan proceeds are not taxable to the borrower, which is an additional bonus to consider. 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. CIRCLE NO. 149 http://www.HotelMotel.com http://www.HotelMotel.com/digital_edition http://www.pgpro.com

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Hotel & Motel Management - November 3, 2008 Contents The Rate Debate Accor Defines Motel 6 Prototype Rollout Holiday Inn Eyes Upscale, Timeshare Perspective Economy Sets Tone at The Lodging Conference Mellow Vibe Meets Bold Design at HD Boutique Expo IH/M&RS to Focus on Going Green Legally Speaking Sales Clinic On Finance Travel Trends Cornell Insights Franchise Law HotelWorld Update Trends & Stats Energy Star Update Energy Star Update An Industry Connected People on The Move Annual GM Survey Point-of-Sale Systems IH/M&RS Product Preview Outdoor Lighting Refrigeration Marketplace Ad/Editorial Index Classifieds Checking Out

Hotel & Motel Management - November 3, 2008

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