Aries Capital Arranges Construction/PIP Financing for Reflagging of 3 Hotels to La Quinta Inns
- North Olmsted, OH
- 300 Rooms Total
- Part of 3 Hotel Deal
$8 Million Total for 3 Hotels
On behalf of a client, a pension fund advisor had invested in three Hampton Inn hotel properties. The properties, located in Canton, Ohio, Cleveland, Ohio, and Rochester, New York, were constructed in the 1990s. Each featured approximately 100 rooms.
The advisor placed a $25 million permanent first mortgage on the properties at the time of acquisition. In 2008, the firm learned that the Hampton Inn flags would not be renewed, and the properties would have to be reflagged.
After thorough market research, the borrower determined that the La Quinta Inn brand would be the best fit for the markets in which they were located. The reflagging, however, was contingent upon property improvements, so the borrower required an $8 million second mortgage to execute the property improvement plan.
Initially, the borrower went to market alone to secure financing and was unsuccessful. The borrower then signed an exclusive agreement with a competing mortgage banking firm which was also unable to secure financing for the properties.
The hotel management team for the properties had worked with Aries Capital on other projects, and when they learned of the financing difficulties, they steered the property owner to us.
Since the hotels were investment properties for managed pension funds, the borrower required a non-recourse loan for the improvements. Further complicating matters, the existing $25 million first mortgage acted as a deterrent to many lenders. By the time the property owner came to Aries Capital in early 2009, the market collapse had rendered capital scarce and risk-averse. Traditional sources of capital were unwilling to lend the $8 million in a subordinate position.
Non-recourse debt is not readily available to the hospitality sector, especially when construction and reflagging are part of the equation. Even highly performing assets with well capitalized borrowers were difficult to finance at that time. Fortunately, Aries was able to provide the borrower with a creative solution which enabled the franchising requirements to be met.
The Capital Structure:
Aries was able to negotiate with the first mortgage lender to put the existing $25 million loan into a subordinate position, and place the $8 million in new debt as a first mortgage. The reflagging/construction and furniture, fixtures and equipment (FF&E) loan arranged was a five-year, fixed rate mortgage with a 25-year amortization. A consortium of credit unions provided the financing.
The three hotels were successfully renovated and reflagged, and remain operational assets for the borrower.