| If you are an experienced hotel operator, you will | | | | markets. In addition, developments that large are |
| know that acquiring hotel assets can be quite | | | | not meant to be heavily leveraged. A 1,800 room |
| challenging these days. REITS and private equity | | | | hotel is not mean to be 80% occupancy. It should |
| firms have a lot of cash burning a hole in their | | | | be profitable at 60%. Your mid-scale products |
| pockets and stay zeroed in on the hotel market. | | | | such as Hampton Inn by Hilton or Holiday Inn |
| This is pushing the demand up for hotels and | | | | Express by Intercontinental Hotel Group or select |
| keeping prices high. The problem that is occurring | | | | service product such as Courtyard by Marriott or |
| is that the returns investors would like to get are | | | | Hilton Garden Inn by Hilton can get this type of |
| being squeezed. The credit crunch is causing new | | | | financing. The loan amounts usually fall below $50 |
| loans to be valued at higher interest rates and | | | | million dollars and have consistent track record of |
| lower loan to value. This translates to higher down | | | | corporate clientele that keeps occupancy up high |
| payments and less cash to take home at the end | | | | enough to service the debt. |
| of the year. This should push the price of hotels | | | | In addition, the hotel franchisors have a history of |
| down eventually because Wall Street backed | | | | being selective of the location and whom they |
| loans were readily available at 6% interest and | | | | allow to operate. Lenders know that if you got |
| even below to make even expensive hotel | | | | approved by them that you have experience and |
| purchases cash flow out for the investor. Right | | | | your location is deemed profitable. Most |
| now Wall Street is trying to figure out just what | | | | importantly, projects of this size are usually |
| they want so it may take a few months for the | | | | owned by companies that don't mind the |
| market for those loans to settle and it will | | | | headache because they are not usually institutional |
| definitely not be as liberal as before. | | | | investors. They want maximum returns are highly |
| You can still get high leverage loans such as 85% | | | | motivated to take care of their property. Lastly, |
| loan to value or 85% loan to cost on hotels, but | | | | smaller hotels have higher net operating incomes |
| you have to have the right product, the right | | | | than full service hotels because luxury services |
| owner, and the right lender. Large projects such | | | | don't always get used, but add to the cost of |
| as resort hotels or skyscraper hotels in Boston | | | | operation. |
| Harbor will not get this kind of financing because | | | | So always monitor your capital structure to see |
| cash heavy companies such as a private equity or | | | | how much debt you really want on hotels. |
| REIT are only looking to get their required return | | | | Sometimes high leverage increases your cash on |
| with minimal headache. They don't want to worry | | | | cash returns significantly. Sometimes, it's more |
| that the property won't meet the mortgage | | | | headache than you need. Either way, a good |
| because they could have investments spread all | | | | market study of your hotel can help you get |
| over the country in all kinds of real estate | | | | higher returns. |