Mr. Clark

Finance & Investment

ADC Financing - Hoteliers Have More Financing Options Than They May Think

By Bryan J. Clark, President & CEO, Lion CFC Inc

In the world of "ADC" financing, the loan products vary widely from lender to lender. Many lenders will provide Acquisition and Development financing, others will provide only the Development and Construction financing which requires the owner or developer to first acquire the land before obtaining development and construction financing. On the contrary, some lenders will only provide the Construction aspect of financing. Ideally, all phases of financing will be secured from the same lending or funding source. Additionally, typical construction financing will require the construction loan to be paid off upon completion of construction, meaning mini "perm" or bridge financing will be required to pay off the construction loan. Once the property stabilizes and consistently produces the necessary cash flow, the mini "perm" or bridge financing will be paid off by permanent financing. At each stage of the process i.e. construction, mini "perm," permanent, the project will need to be re-underwritten with additional costs and fees required. Although less frequently offered, some lenders will underwrite the entire project up-front, including acquisition, development, construction, mini "perm," and permanent financing, with one set of fees. This of course is the ideal scenario.

As credit tightens and hotel development projects are more heavily underwritten, "pre-sales" are becoming more important. Of course the first thought that comes to mind is "hotels don't have pre-sales!" "Pre-sales only apply to homebuilders, resorts selling timeshares, etc." Well, that used to be true. By now almost everyone within the industry should be familiar with the term condo hotel, or "condotel." One of the major forces behind the advent of this particular property/project type is this very reason, the necessity for a lender to see pre-sales and immediate cash flow from a project. The ability to sell a condotel room or unit for $500k-$2M enables a hotel developer or owner to show pre-sales. The sale of these units also allows the property to pay back investors and lenders much sooner. A hotel would have to rent a room several thousand times to see the revenue that a single condotel unit sale provides.

Due to the recent "credit crisis" and ensuing "$700B Bailout," hotel developers, owners, and investors can surely expect further tightening of the underwriting and overall leverage given to Borrowers in the current marketplace. Assets will be sold at deep discount and real estate values could (and most likely will) be effected. This means a couple of things to anyone trying to finance any aspect of a hotel operation in this market. First, banks and all other funding institutions will be appraising real estate/hotel assets using very conservative methods, often six month market time liquidation values as opposed to twelve to eighteen month market time values. This method of appraising a hotel will usually cut the value of the property by ten to thirty percent, sometimes more, depending on the location and market of the property. Second, the maximum "loan-to-value" ratio offered will be reduced as well from the more conventional seventy percent as investor confidence deteriorates further. By combining a reduced "loan-to-value" with a reduced appraised value, the maximum loan amount offered by a funding institution to a Borrower could be twenty to forty percent less than what it would have been for the very same property twelve to twenty-four months ago.

So where is the good news and what can be done to secure the required financing? As mentioned earlier, "pre-sales" are more important than ever in light of the current market. Developers and Borrowers must search hard for great deals on land and existing properties. They also must perform extensive due-diligence on any property they intend to acquire or construct as deep discounts on properties do not always guarantee success in the long run. In addition, it is very important for all hotel owners, borrowers, developers, etc. to be in touch with an equity partner or joint venture equity group that is looking to be involved in a hotel project. If an equity partner cannot be located, a qualified broker can usually put you in touch with the right people. The important point here is that it is advantageous in the current market to have equity available prior to beginning the search for debt financing, regardless of the financing needed. Since lenders are becoming more conservative, it is very likely that cold hard cash will be needed to bridge the "finance gap" to close whatever deal is on the table. Most lenders will not even look at a deal if they cannot determine where the equity or cash will be coming from to close on the transaction. This means that one should not expect a commitment for financing from any funding institution if the necessary cash/equity is not on the table. This is not always the case as there are exceptions to every rule but it is a strategy that will almost always save a great deal of time (and usually expense) in the long run.

It should be clear by now that things are going to get worse before they get better at least in terms of the financial markets. This does not mean, however, that financing will not be available for quality hotel finance transactions. Of course each lender's definition of a "quality" transaction is different but their desire to see "pre-sales" and available cash or joint venture equity is not. If a great deal or project is located and these several points have been accounted for, securing adequate financing is very likely.

Bryan J. Clark is President and CEO of Lion Commercial Funding Consultants Inc. Lion CFC maintains relationships with real estate investment trusts, hedge funds, and a variety of private money pools. The firm is a leader in innovative alternative finance structures and solutions involving standby letters of credit, bank guarantees, medium term notes, bills of exchange, and "take or pay" contracts. Mr. Clark is a member of the Urban Land Institute and contributing writer to various monthly publications. Mr. Clark can be contacted at 858-602-8080 or info@lioncommercial.com Extended Bio...

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