Today's Hotelier - March 2018 - 38

FINANCE

Hotel Financing Q&A
Should I use debt instead of equity to fund my growth plan?
by RUSHI SHAH

H E T H E R
you are looking to acquire
a cash-f lowing
or
dist ressed
property, or are
creating value through renovation or
conversion, equity is always the most
expensive and elusive type of capital.
For a property in a primary market with
standard market risk the cost of capital
for preferred equity for 80.1% to 90% of
value is typically 15%, and for JV equity
or common equity at 90.1% of value and
above, is typically 18% or more. For debt
on the same property, however, the cost
of capital typically decreases to 4.5% for
65% of value and 12% for 65.1% to 80%
of value. Metrics for properties in secondary and tertiary markets will vary,
and in a bullish economy with rising
rates, numbers can increase based on
the current supply-demand dynamics
for capital.
By leveraging the accrued equity in
your portfolios to put on senior debt
instead of using equity, you can more
effectively procure the capital you need
at a typically much lower cost, alleviate
many of the pain points of using equity,
minimize your future risk and improve
your overall position for growth.
For example, one of our clients used
his imputed equity in two of his assets to
help buy a third Hilton-branded property
without any down payment. By crosscollateralizing the hotel with another

3 8  | MARCH 2018 | TODAYSHOTELIER.COM

asset with significant built-up equity, the
borrower avoided shelling out valuable
cash from his own balance sheet and
effectively reduced the opportunity cost
of the capital.
In another transaction, we are
working with a client to refinance his
10-hotel portfolio, where three of the
properties were acquired within the last
year. We are leveraging a non-recourse
loan to deliver higher proceeds than the
entire cost basis of all of his properties
in the lifetime of the deals. This solution surpasses any equity arrangement
that any equity partner would be willing to offer.
Executing a debt transaction is also
easier than securing equity. While sourcing pure equity, transaction times can be
long and dealing with multiple partners
(and their individual personalities and
often conflicting goals) can be onerous.
Deals may take months, or partners may
bail unexpectedly, leaving your growth
engine at a standstill. In addition, you
typically have to share the profits with
your equity partners beyond a certain
threshold, adding to equity's expense. In
contrast, debt ensures you retain 100%
control of your property and its cash
flow, and when done through a qualified intermediary brings certainty of
execution. Don't fall for someone that
just promises low rates. The real proof
is in the transaction execution and closing. Ask any potential intermediary to
show you an actual closing statement

disclosing the rate he or she achieved
for a recent, similar deal.
In many cases, debt is the only means
to access capital without any tax consequences. Non-recourse debt through
CMBS and other non-traditional lenders allows borrowers to monetize the
accrued value by taking cash out. Unlike
conventional and SBA loans, there is no
ceiling on how much you can take out,
and the funds are typically tax-free.
Always consult your tax advisor.
Another benefit of debt is it gives you
ample capex capital to cover all of your
Property Improvement Plans (PIPs). This
ensures your franchise continues for
the foreseeable future, and allows you
to future-proof your portfolio against
ever-changing franchise requirements.

CAN I STILL LEVERAGE DEBT
IF MY HOTEL ISN'T YET
STABILIZED OR HAS HAD
WEAKER PERFORMANCE?
Absolutely. You can typically stretch on
debt terms even if some of your assets
are not fully-seasoned. Shorter-term,
interest-only bridge loans can buy you
time to execute your business plan
before refinancing or selling your property. An experienced intermediary can
negotiate on rate, term proceeds and
reserve requirements to creatively structure your deal to cure any issues.
With a debt transaction, you can also
buttress less strong properties by pooling or cross-collateralizing them with


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Table of Contents for the Digital Edition of Today's Hotelier - March 2018

Letter From the Chairman
Letter From the President & CEO
#AAHOACON18 Spotlight
Government Affairs & Advocacy
The C-Suite
Common Ground
Elevate Yourself to a Higher Role in the Industry
Next-Level Housekeeping via Technology
Mentoring Matters
Small Business
Finance
Marketing
Technology
Compliance & Legal
Leadership
Guest Experience
Aahoa Founding Members
Classifieds
Advertiser Index
Back of the House
Today's Hotelier - March 2018 - Intro
Today's Hotelier - March 2018 - cover1
Today's Hotelier - March 2018 - cover2
Today's Hotelier - March 2018 - 3
Today's Hotelier - March 2018 - 4
Today's Hotelier - March 2018 - 5
Today's Hotelier - March 2018 - 6
Today's Hotelier - March 2018 - 7
Today's Hotelier - March 2018 - 8
Today's Hotelier - March 2018 - 9
Today's Hotelier - March 2018 - Letter From the Chairman
Today's Hotelier - March 2018 - 11
Today's Hotelier - March 2018 - Letter From the President & CEO
Today's Hotelier - March 2018 - 13
Today's Hotelier - March 2018 - #AAHOACON18 Spotlight
Today's Hotelier - March 2018 - 15
Today's Hotelier - March 2018 - 16
Today's Hotelier - March 2018 - 17
Today's Hotelier - March 2018 - Government Affairs & Advocacy
Today's Hotelier - March 2018 - 19
Today's Hotelier - March 2018 - The C-Suite
Today's Hotelier - March 2018 - 21
Today's Hotelier - March 2018 - Common Ground
Today's Hotelier - March 2018 - 23
Today's Hotelier - March 2018 - Elevate Yourself to a Higher Role in the Industry
Today's Hotelier - March 2018 - 25
Today's Hotelier - March 2018 - 26
Today's Hotelier - March 2018 - 27
Today's Hotelier - March 2018 - Next-Level Housekeeping via Technology
Today's Hotelier - March 2018 - 29
Today's Hotelier - March 2018 - 30
Today's Hotelier - March 2018 - 31
Today's Hotelier - March 2018 - Mentoring Matters
Today's Hotelier - March 2018 - 33
Today's Hotelier - March 2018 - 34
Today's Hotelier - March 2018 - 35
Today's Hotelier - March 2018 - Small Business
Today's Hotelier - March 2018 - 37
Today's Hotelier - March 2018 - Finance
Today's Hotelier - March 2018 - 39
Today's Hotelier - March 2018 - Marketing
Today's Hotelier - March 2018 - 41
Today's Hotelier - March 2018 - Technology
Today's Hotelier - March 2018 - 43
Today's Hotelier - March 2018 - Compliance & Legal
Today's Hotelier - March 2018 - 45
Today's Hotelier - March 2018 - Leadership
Today's Hotelier - March 2018 - 47
Today's Hotelier - March 2018 - 48
Today's Hotelier - March 2018 - 49
Today's Hotelier - March 2018 - Guest Experience
Today's Hotelier - March 2018 - 51
Today's Hotelier - March 2018 - 52
Today's Hotelier - March 2018 - 53
Today's Hotelier - March 2018 - Aahoa Founding Members
Today's Hotelier - March 2018 - 55
Today's Hotelier - March 2018 - Classifieds
Today's Hotelier - March 2018 - 57
Today's Hotelier - March 2018 - 58
Today's Hotelier - March 2018 - 59
Today's Hotelier - March 2018 - 60
Today's Hotelier - March 2018 - 61
Today's Hotelier - March 2018 - 62
Today's Hotelier - March 2018 - Advertiser Index
Today's Hotelier - March 2018 - 64
Today's Hotelier - March 2018 - Back of the House
Today's Hotelier - March 2018 - 66
Today's Hotelier - March 2018 - cover3
Today's Hotelier - March 2018 - cover4
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