Today's Hotelier - April 2018 - 48

FINANCE

we can convince the lenders to accept
projections that have over 100 percent
of the RevPar index penetration.

CAPITALIZATION OR CAP RATE
To calculate your property's unleveraged
value, lenders divide your NOI by your
hotel's estimated value (based on sales of
comparable hotels in the same market)
to arrive at a capitalization or cap rate.
cap rates can also be derived using market comps that are typically derived after
consulting with the investment banker's
appraisal contacts. Underwriters then
apply their maximum LTV to determine
the proposed loan amount. If your cash
flow is already stabilized, and there is
no or limited upside, then the cap rate
will already reflect this and will be
higher. Conversely, if there is still room
to increase value, your cap rate will be
lower and your hotel's value higher.
For example, if your hotel currently
produces $1 million in cash flow and is
running at 80 percent RevPar index, but
next year cash flow increases to $1.5 million at 100 percent of RevPar index, you
can justify a 7.5 percent cap rate instead
of 8 percent. The lower cap rate garners
you a hotel value of $13.3 million instead
of $12.5 million.

DEBT YIELD & LTV
REQUIREMENTS
Debt yield is arguably the most important
metric for the lenders. Because lenders
are focused on their exit strategy, your
NOI is also divided by the proposed loan
amount to determine what the expected
rate of return on a lender's investment
would be on day one, or its debt yield.
When income is less predictable, as in
markets where cash flow is less stable or
for flags lower on the STR chain scale, or
when credit markets tighten hotel lending, lenders raise their required debt
yield level. This in turn reduces how
much you can borrow. Your final loan
amount, however is still subject to the
lender's loan-to-value (LTV) cap which
is usually 70 percent for select service
hotels for a loan with senior lien.

4 8  | APRIL 2018 | TODAYSHOTELIER.COM

TOTAL COST BASIS
IN THE PROPERTY
Often overlooked, but important to credit
committees and bond market rating
agencies, is the total dollars invested for
construction or capital improvements
since the hotel was built or acquired.
This is increasingly becoming an important measure as we approach peak of an
economic recovery.
These investments often trip up
borrowers who mistakenly expect the
value of their hotel to exactly mirror the
amount of money they have put into the
asset. This misconception is like installing a $50,000 chandelier imported from
Italy in your dining room and expecting your home's value to immediately
increase by $50,000.
There are ways to effectively close the
gap, however some are more palatable
than others. We had a client with a brand
new full-service hotel with a good flag
in a good market looking to refinance
his construction loan. Unfortunately,
the developer had gone over budget
due to construction delays, general
contractor mismanagement and excessive customizations beyond the brand's
requirements. The borrower wanted to
refinance everything he had invested,
but at the end of the day the hotel's value
wasn't there yet to commensurate with
the market.
In order to cover his total cost basis,
the borrower faced the choice of investing more of his own capital, raising additional common equity from his partners
or bridging the gap with a high-priced,
mezzanine loan subordinate to the
senior debt. Instead, by negotiating with
the current lender to hold back funds
as preferred equity until the hotel stabilizes, we were able to refinance the
client to a 24-month, interest-only bridge
loan. Once the property is stabilized,
we will leverage our capital source relationships to refinance the bridge loan to
non-recourse permanent debt, enable
the borrower to recoup his investment
cost as cash out, and take out the current
lender at the same time.

In some situations, mezzanine debt
can be a viable solution. However, your
investment banker should first exhaust
more favorable options, as rates for
hotels range between 10 percent and
12 percent compared to 4.5 percent to
6.5 percent for senior debt, and lenders typically only write check sizes for
$3 million and up.

ARE MY PROPERTY'S
METRICS ABSOLUTE?
OR IS THERE ROOM TO
NEGOTIATE WITH LENDERS
TO INCREASE LEVERAGE?
Bottom line, when determining value
and leverage, you must be realistic.
No one is going to give you $110 for
a $100 bill. Structuring a commercial
real estate loan transaction, however,
is both an art and a science. By leveraging long-time lender relationships,
structuring around pain points, identifying and alleviating any anomalies and
inconsistencies in your or your competitive data, augmenting current and
future market insights to shape projections, and successfully demonstrating
your ability to execute your business
plan, a skilled investment banking professional can be both the sculptor and
fulcrum of certainty of execution and
optimal results.
■
Rushi Shah is principal
and CEO of the commercial
mortgage and real estate
investment banking
firm and AAHOA Club
Blue member, Aries
Conlon Capital. As a leader in hospitality
financing, Shah specializes in structuring
and placing high-leverage, non-recourse
bridge and permanent debt with cash
out for full- and limited-service hotels
nationwide. Since joining the firm's
predecessor Aries Capital in 2015, Shah has
structured and closed hundreds of millions
in financing for all property types. Shah
has held previous positions at Northern
Trust and has an MBA from The University
of Chicago's Booth School of Business.


http://www.TODAYSHOTELIER.COM

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
https://www.nxtbook.com/naylor/AAHOM/AAHOM0518
https://www.nxtbook.com/naylor/AAHOM/AAHOM0418
https://www.nxtbook.com/naylor/AAHOM/AAHOM0318
https://www.nxtbook.com/naylor/AAHOM/AAHOM0218
https://www.nxtbook.com/naylor/AAHOM/AAHOM0118
https://www.nxtbook.com/naylor/AAHOM/AAHOM1217
https://www.nxtbook.com/naylor/AAHOM/AAHOM1117
https://www.nxtbook.com/naylor/AAHOM/AAHOM1017
https://www.nxtbook.com/naylor/AAHOM/AAHOM0917
https://www.nxtbook.com/naylor/AAHOM/AAHOM0817
https://www.nxtbook.com/naylor/AAHOM/AAHOM0717
https://www.nxtbook.com/naylor/AAHOM/AAHOM0617
https://www.nxtbook.com/naylor/AAHOM/AAHOM0517
https://www.nxtbook.com/naylor/AAHOM/AAHOM0417
https://www.nxtbook.com/naylor/AAHOM/AAHOM0317
https://www.nxtbook.com/naylor/AAHOM/AAHOM0217
https://www.nxtbook.com/naylor/AAHOM/AAHOM0117
https://www.nxtbook.com/naylor/AAHOM/AAHOM1216
https://www.nxtbook.com/naylor/AAHOM/AAHOM1116
https://www.nxtbook.com/naylor/AAHOM/AAHOM1016
https://www.nxtbook.com/naylor/AAHOM/AAHOM0916
https://www.nxtbook.com/naylor/AAHOM/AAHOM0816
https://www.nxtbook.com/naylor/AAHOM/AAHOM0716
https://www.nxtbook.com/naylor/AAHOM/AAHOM0616
https://www.nxtbook.com/naylor/AAHOM/AAHOM0516
https://www.nxtbook.com/naylor/AAHOM/AAHOM0416
https://www.nxtbookmedia.com