Today's Hotelier - April 2018 - 46

FINANCE

Hotel financing Q&A
by RUSHI SHAH

SHOULD FINANCING AT THE
HIGHEST POSSIBLE LEVERAGE
BE MY GOAL FOR HOTEL
FINANCING? HOW DO I KNOW
THE RIGHT AMOUNT OF DEBT
TO PUT ON MY PROPERTY?
It's easy for borrowers to confuse how
much debt they want to pay off with how
much debt their property can actually
support. In an effort to wring every possible dollar out of a transaction, we've
seen hotel owners go from broker to
broker in pursuit of blue-sky leverage.
The end result? Best case, someone overpromises, and after months of heartache
re-trades the borrower to a lower loan
amount. Worst case, the property ends
up overleveraged, exposing the borrower
to increased risk if cash flow declines.
Subsequently, if there is even a minor
ripple in the market's economic cycle,
the borrower could be left up the proverbial creek without a paddle and lose
the property.
To ensure a more prudent amount of
leverage, the first step is to work with
an experienced investment banking professional to assess your situation and
accurately diagnose how much debt your
property will bear.
Your banker will look at your property's cash flow, competitiveness and
value through the lens of a lender.
Lenders don't wait for the story to
unfold, they skip straight to the ending or their exit strategy from the loan.
First, lenders want to know if the property's actual cash flow, or projected cash
flow once you've executed your business
plan, will support the debt service after
other expenses without any interruption

4 6  | APRIL 2018 | TODAYSHOTELIER.COM

in payments. Second, they validate
whether the proceeds from the sale or
refinance of the property would provide
sufficient return of capital to cover the
principal balance of their loan. Third, the
lender determines if the property's cash
flow and value will enable it to be sold
or successfully refinanced to a fixedrate loan at maturity. Owners have to
remember that the lenders are getting
paid a low return for their debt capital, so
their risk appetite is always lower than
that of an equity investor. Lenders' primary objective is capital preservation.
To answer these questions, lenders
calculate key metrics that indicate if
the property is already stabilized and
performing at market, or if it is still in
transition post construction, conversion,
renovation or acquisition.
Stabilized properties will be evaluated
based on historical performance that is
overlaid with current conditions and
expected future market trends, making
the lender's exit strategy relatively clear
cut and capital options more plentiful.
Signs a property is stabilized include:
Occupancy levels and average daily
rates that are at par with those of
competitive sets.
Expenses that are in line with
benchmarks.
Limited deferred maintenance.
Appropriate levels of reserves.
Seasoned management.
Cash flow potential that is already
maximized.
Transitioning properties, on the other
hand, have not reached market levels
and can only be assessed based on projected performance. Shorter terms and

higher rates go hand-in-hand with this
increased level of lender risk, and capital
is more scarce. Any properties that are
less than stabilized and have to rely on
the projections qualify for bridge loans.
Below are the primary calculations
your investment banker and lender will
use to size your loan.

NET CASH FLOW (NCF) OR NET
OPERATING INCOME (NOI)
This is your net profit before paying
for any debt or any one-time capital
expenses. It is calculated by subtracting expenses (including a typical 3 percent management fee) and any reserves
(such as a 4 percent reserve for furniture, fixtures or other equipment (FF&E))
from your hotel's historical revenue for
stabilized properties, and 36 months
projected revenue for properties still
in transition.
For example, a Hampton Inn that
has been open for two months is doing
$50,000 per month in net operating
income (NOI) but is expected to do an
annual NOI of $1.2 million at a 100 percent RevPAR index and at a market NOI
expense ratio of 35 percent for a typical
Hampton Inn. This property can withstand a bridge loan of up to $10 million
because that's what the stabilized projections can support.

REVPAR INDEX
This index offers lenders insight into how
well your hotel is managed in terms of
revenue compared to your competitive
set. The definition of a stabilized property
means an index is closer to 90 percent
or 100 percent. On an exceptional basis,

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

Letter From the Chairman
Letter From the President & CEO
Government Affairs & Advocacy
The C-Suite
Common Ground
Summer Season Offers Opportunities to Drive Business
Maximizing Your Experiential Travel Potential
What Can Hoteliers Learn From Other Industries?
Trends to Watch
Finance
Operations
Marketing
Small Business
Spotlight
Q&A
Perspectives
Travel
Leadership
Strategy
Design
Guest Experience
Food & Beverage
Technology
Operations
HR & Employee Relations
AAHOA Club Blue, Platinum, Gold & Silver Members
AAHOA @ Industry Events
Classifieds
Advertiser Index
Back of the House
Today's Hotelier - April 2018 - Intro
Today's Hotelier - April 2018 - cover1
Today's Hotelier - April 2018 - cover2
Today's Hotelier - April 2018 - insert1
Today's Hotelier - April 2018 - insert2
Today's Hotelier - April 2018 - 3
Today's Hotelier - April 2018 - 4
Today's Hotelier - April 2018 - 5
Today's Hotelier - April 2018 - 6
Today's Hotelier - April 2018 - 7
Today's Hotelier - April 2018 - 8
Today's Hotelier - April 2018 - 9
Today's Hotelier - April 2018 - 10
Today's Hotelier - April 2018 - 11
Today's Hotelier - April 2018 - Letter From the Chairman
Today's Hotelier - April 2018 - 13
Today's Hotelier - April 2018 - Letter From the President & CEO
Today's Hotelier - April 2018 - 15
Today's Hotelier - April 2018 - Government Affairs & Advocacy
Today's Hotelier - April 2018 - 17
Today's Hotelier - April 2018 - 18
Today's Hotelier - April 2018 - 19
Today's Hotelier - April 2018 - The C-Suite
Today's Hotelier - April 2018 - 21
Today's Hotelier - April 2018 - Common Ground
Today's Hotelier - April 2018 - 23
Today's Hotelier - April 2018 - Summer Season Offers Opportunities to Drive Business
Today's Hotelier - April 2018 - 25
Today's Hotelier - April 2018 - 26
Today's Hotelier - April 2018 - 27
Today's Hotelier - April 2018 - 28
Today's Hotelier - April 2018 - 29
Today's Hotelier - April 2018 - Maximizing Your Experiential Travel Potential
Today's Hotelier - April 2018 - 31
Today's Hotelier - April 2018 - 32
Today's Hotelier - April 2018 - 33
Today's Hotelier - April 2018 - 34
Today's Hotelier - April 2018 - 35
Today's Hotelier - April 2018 - What Can Hoteliers Learn From Other Industries?
Today's Hotelier - April 2018 - 37
Today's Hotelier - April 2018 - 38
Today's Hotelier - April 2018 - 39
Today's Hotelier - April 2018 - 40
Today's Hotelier - April 2018 - 41
Today's Hotelier - April 2018 - Trends to Watch
Today's Hotelier - April 2018 - 43
Today's Hotelier - April 2018 - 44
Today's Hotelier - April 2018 - 45
Today's Hotelier - April 2018 - Finance
Today's Hotelier - April 2018 - 47
Today's Hotelier - April 2018 - 48
Today's Hotelier - April 2018 - 49
Today's Hotelier - April 2018 - Operations
Today's Hotelier - April 2018 - 51
Today's Hotelier - April 2018 - 52
Today's Hotelier - April 2018 - 53
Today's Hotelier - April 2018 - Marketing
Today's Hotelier - April 2018 - 55
Today's Hotelier - April 2018 - 56
Today's Hotelier - April 2018 - 57
Today's Hotelier - April 2018 - Small Business
Today's Hotelier - April 2018 - 59
Today's Hotelier - April 2018 - Spotlight
Today's Hotelier - April 2018 - 61
Today's Hotelier - April 2018 - Q&A
Today's Hotelier - April 2018 - 63
Today's Hotelier - April 2018 - 64
Today's Hotelier - April 2018 - 65
Today's Hotelier - April 2018 - Perspectives
Today's Hotelier - April 2018 - 67
Today's Hotelier - April 2018 - 68
Today's Hotelier - April 2018 - 69
Today's Hotelier - April 2018 - Travel
Today's Hotelier - April 2018 - 71
Today's Hotelier - April 2018 - 72
Today's Hotelier - April 2018 - 73
Today's Hotelier - April 2018 - 74
Today's Hotelier - April 2018 - 75
Today's Hotelier - April 2018 - Leadership
Today's Hotelier - April 2018 - 77
Today's Hotelier - April 2018 - 78
Today's Hotelier - April 2018 - 79
Today's Hotelier - April 2018 - 80
Today's Hotelier - April 2018 - 81
Today's Hotelier - April 2018 - Strategy
Today's Hotelier - April 2018 - 83
Today's Hotelier - April 2018 - 84
Today's Hotelier - April 2018 - 85
Today's Hotelier - April 2018 - Design
Today's Hotelier - April 2018 - 87
Today's Hotelier - April 2018 - 88
Today's Hotelier - April 2018 - 89
Today's Hotelier - April 2018 - Guest Experience
Today's Hotelier - April 2018 - 91
Today's Hotelier - April 2018 - 92
Today's Hotelier - April 2018 - 93
Today's Hotelier - April 2018 - 94
Today's Hotelier - April 2018 - 95
Today's Hotelier - April 2018 - Food & Beverage
Today's Hotelier - April 2018 - 97
Today's Hotelier - April 2018 - 98
Today's Hotelier - April 2018 - 99
Today's Hotelier - April 2018 - 100
Today's Hotelier - April 2018 - 101
Today's Hotelier - April 2018 - Technology
Today's Hotelier - April 2018 - 103
Today's Hotelier - April 2018 - 104
Today's Hotelier - April 2018 - 105
Today's Hotelier - April 2018 - Operations
Today's Hotelier - April 2018 - 107
Today's Hotelier - April 2018 - 108
Today's Hotelier - April 2018 - 109
Today's Hotelier - April 2018 - 110
Today's Hotelier - April 2018 - 111
Today's Hotelier - April 2018 - HR & Employee Relations
Today's Hotelier - April 2018 - 113
Today's Hotelier - April 2018 - 114
Today's Hotelier - April 2018 - 115
Today's Hotelier - April 2018 - 116
Today's Hotelier - April 2018 - 117
Today's Hotelier - April 2018 - AAHOA Club Blue, Platinum, Gold & Silver Members
Today's Hotelier - April 2018 - 119
Today's Hotelier - April 2018 - AAHOA @ Industry Events
Today's Hotelier - April 2018 - 121
Today's Hotelier - April 2018 - 122
Today's Hotelier - April 2018 - Classifieds
Today's Hotelier - April 2018 - 124
Today's Hotelier - April 2018 - 125
Today's Hotelier - April 2018 - 126
Today's Hotelier - April 2018 - 127
Today's Hotelier - April 2018 - 128
Today's Hotelier - April 2018 - 129
Today's Hotelier - April 2018 - 130
Today's Hotelier - April 2018 - 131
Today's Hotelier - April 2018 - 132
Today's Hotelier - April 2018 - Advertiser Index
Today's Hotelier - April 2018 - 134
Today's Hotelier - April 2018 - 135
Today's Hotelier - April 2018 - Back of the House
Today's Hotelier - April 2018 - 137
Today's Hotelier - April 2018 - 138
Today's Hotelier - April 2018 - cover3
Today's Hotelier - April 2018 - cover4
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