Pitfalls of Private Versus Institutional Financing

By Larry K. Kimball Director of Hotel Development, C. W. Clark, Inc. | November 28, 2010

This past tumultuous two year period has seen large and small banks come and go, regulations rise, consumer demand fall, hotels close, and the general public's acceptance of uncertainty about the future. While we are all reluctantly drinking the "new normal" kool-aid manufactured by Wall Street and politicians, commercial real estate developers need to consider the implications on financing. Are the traditional US institutional lenders lending? Not really. Will institutional banks, pensions, and life companies return and who are all of these new private capital groups? This article is a roadmap for successfully navigating the 2011 financing maze.

What is now affecting the traditional institutional lenders?

Basel Global Cure All

Like the case where the medicine harms the patient, the recent introduction of a global liquidity standard for the largest banks is expected by many to restrict credit and increase borrowing costs . As a contrary indicator that helps prove this growing consensus, Treasury Secretary Geithner said the opposite will be true- US banks can meet higher capital rules through future profits without crimping lending. If that is true, why did Deutsch Bank, historically an aggressive hotel construction lender, announce in September 2010 plans to raise $13.3 billion in new capital through a stock offering? Why would Angela Knight of the British Banker's Association state "All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. The result is that the cost of credit - the price that borrowers pay for money - will rise. The cheap money era is over. " As you can see, the new liquidity standard that essentially requires a doubling of risk capital over the next few years is an international standard and not a US-only issue.

US Dodd-Frank Reform

Financial regulatory reform in the form of this 2,300 page law adds uncertainty while providing new safeguards. A recent AEI publication summarizes the potential impact of the law very well:

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Guest Service: A Culture of YES

In a recent global consumers report, 97% of the participants said that customer service is a major factor in their loyalty to a brand, and 76% said they view customer service as the true test of how much a company values them. And since there is no industry more reliant on customer satisfaction than the hotel industry, managers must be unrelenting in their determination to hire, train and empower the very best people, and to create a culture of exceptional customer service within their organization. Of course, this begins with hiring the right people. There are people who are naturally service-oriented; people who are warm, empathetic, enthusiastic, pleasant, thoughtful and optimistic; people who take pride in their ability to solve problems for the hotel guests they are serving. Then, those same employees must be empowered to solve problems using their own judgment, without having to track down a manager to do it. This is how seamless problem solving and conflict resolution are achieved in guest service. This willingness to empower employees is part of creating a Culture of Yes within an organization.  The goal is to create an environment in which everyone is striving to say “Yes”, rather than figuring out ways to say, “No”. It is essential that this attitude be instilled in all frontline, customer-facing, employees. Finally, in order to ensure that the hotel can generate a consistent level of performance across a wide variety of situations, management must also put in place well-defined systems and standards, and then educate their employees about them. Every employee must be aware of and responsible for every standard that applies in their department. The April issue of the Hotel Business Review will document what some leading hotels are doing to cultivate and manage guest satisfaction in their operations.