The Hotel Times - September 2008 - (Page 16)

CAPITAL OUTLOOK » BY GREG O’STEAN Know the underwriting process Due diligence goes a long way S Greg O’Stean is the EVP and managing director of GE Real Estate’s North America Lending division. Visit www.gerealestate.com. ometimes working with a lender’s underwriter feels like a visit with an undertaker, with a similar outcome. How do you ensure the success of your loan request? It helps to understand the lender’s process, which involves a lot more than reviewing the subject’s recent performance and the borrower’s pro forma. A good hotel underwriter should expect to: Analyze historical operating statements, budgets and pro formas relative to comparable industry statistics and to the lender’s own experience. Understand the local expense factors for major items such as labor, food and beverage, utilities, insurance and property taxes. Adjust for any non-market contracts that are expiring or subject to termination, such as below-market management or franchise fees. Visit the subject and the competitive set; interview the GM and consult with the local convention and visitors bureau and planning ofﬁce to understand the subject’s competitive position in terms of location, market orientation, occupancy, average daily rate, chain afﬁliation and physical plant. Is the subject already achieving 100-percent penetration? If not, are the barriers to increased performance primarily static or dynamic? Identify the market segmentation and the competitive set for the subject, and estimate the future demand potential for each segment. Will higher fuel prices reduce leisure demand? Will decreased airlift have an impact on corporate demand? Will corporate travel reductions decrease group bookings? Are local demand generators growing or shrinking? Determine how much additional room supply is projected for the market, and how competitive the new supply will be versus the subject. How did the subject perform the last time competitive supply was added? What are the barriers to entry in this market? How does the subject’s estimated value/key compare to replacement costs? Understand the subject’s historic and projected capital expenditures and plant operation and maintenance costs. Where is the property in the product improvement plan cycle? Are historical POM expenses signiﬁcantly above or below the industry average? Does the hotel exhibit any functional obsolescence? A lender will often assume the worst-case scenario. Consider the exit scenario: would the subject do better with a different ﬂag? Are other ﬂags available? Review the experience of the borrower and the manager. Have they owned or managed similar assets in a down cycle? How is the guest satisfaction at their other hotels? Are they in good standing with the major brands? Review recent comparable sales and select an appropriate discount rate and terminal cap rate to use in a 5- or 10-year discounted cash ﬂow. Some of the analysis may seem extraneous, but in the absence of information, a lender will often assume the worst-case scenario. However, if a borrower employs a similar process to analyze the same set of facts, there should be fewer surprises when a lender ﬁnishes their due diligence. hmm@questex.com 16 The Hotel Times September 2008 www.TheHotelTimes.com http://www.gerealestate.com http://www.TheHotelTimes.com

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The Hotel Times - September 2008 Business Outlook Editorial Outlook Contents In The News Transactional Facts Hurry Up and Wait Capital Outlook Development Outlook Brokerage Outlook International Litigation: Who gets sued? Insurance Outlook Economic Crisis: Stress or Opportunity for Franchisees? Franchise Outlook Ad/Edit Index In Closing

The Hotel Times - September 2008

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