1) Think Beyond the Bank
It’s still a good time to refinance or purchase a hotel. If you want to ensure you get the best financing available, however, don’t limit your search to just your local bank or what you’ve always done before.
Compare non-recourse capital sources such as Wall Street Commercial Mortgage Backed Securities (CMBS) shops, life companies, hedge and private funds and other institutional investors that a) don’t require you to put up personal guaranties, b) make it easier for you to unlock trapped equity by taking unrestricted (usually tax-free) cash out of your property and c) allow you to qualify for higher proceeds.
Know which lenders are active in your market, what properties they’ve financed in the past, and whether they are willing to negotiate on proceeds, terms, interest rate or pre-payment penalties.
Not all CMBS shops are the same, however, so do your homework to understand the nuances or use an experienced intermediary like Aries/Conlon Capital and leverage our experience, market knowledge and capital markets expertise. Why start from scratch when you can benefit from others’ invaluable experience.
Relationships matter, as many lenders are willing to make concessions if they have or worked with the borrower, or the intermediary representing the borrower, on a previous deal.
2) Present an Accurate Picture of Your Property to Tell Your Story Right
Think like a lender and demonstrate a clear exit strategy. In this industry, having “hair” on a deal doesn’t mean the deal can’t get it done, but hiding issues will almost always kill it.
Know what indicators lenders look at and how your stats compare to your competition. Furthermore, make sure your competitive set is accurate. For example, cap rates can be a wildcard. Since cap rates are calculated based on sales prices that have occurred in the past, they can be dramatically skewed in markets where few recent trades have occurred. Be prepared to defend your property’s value by providing current market information and uncovering any anomalies. Address all of this upfront so you don’t get re-traded at the end.
3) Understand Which Levers to Push or Pull to Get What You Want
It’s critical that you know how to use strengths in one area to mitigate weaknesses in another. For example, strong cash flow and predictable demand generators may convince a lender to reduce the number of months of historical data they require, or to lend outside their typical markets.
Do the math and evaluate all your options. You may be able to negotiate a better financing package by proposing partial or full-recourse, hiring an experienced property management company, paying a higher rate in exchange for more proceeds, cross-collateralizing the loan with another property, bringing in a new equity source, or leveraging lucrative (and often not well-publicized) city, state and federal tax credits and other government incentives.
Addressing all of the above is hard work, but it will improve the financing you secure in the end.