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How to Value a Hotel Using The Economy, Financing, Market Place,
Brand, Product and PIP as Guides


by Greg Morris
April 2013

In the mid-2000s, getting hotel financing was usually a piece of cake. Now it’s nowhere near as easy, though it’s getting better as the economy slowly improves. And banks are keeping loan-to-value ratios tight; back in the day, where you could secure a 75 percent LTV loan when things were blowin’ and goin’, today you’d do well to get one of 65 percent.

And to do that, you’ll have to do due diligence on your property and you’ll have to have a plan. Remember, hotels are different from other real estate because they’re really operating businesses – and unlike other forms of real estate, they have to lease up every day to maintain cash flow.

The value of a hotel is determined by its performance, which directly affects its NOI or cash flow.Lenders look at how the hotel, if it’s branded, is performing, its location, the flag it’s flying, how long the license has left to run, the condition of the property, the barriers to entry. And don’t overlook that all-important property improvement plan; a hotel without a PIP and an accurate PIP budget set-aside, that badly needs an upgrade is saddled with something lenders would hardly consider an asset.

Lenders are also going to look at LTV constraints. Say there’s an existing asset and they’re doing a refinance and will only go up to 75 percent LTV. The lender’s going to have an expert appraise the property and the appraiser is going to apply a market cap rate to that NOI and that’s going to provide a value. That valuation is what the lender’s going to lend against.

And even though RevPAR has been showing gains over the past several years, lenders have remained conservative – at least when it comes to hotels. The good news is, hotel performance has improved, mainly because little new supply has come onto the market so existing hotels haven’t had to compete.

Now that those top-line numbers have started to grow, borrowers have been able to improve their bottom line as well because they’re getting more rate and increased profitability on their hotels. So as those trends have continued, the values on hotels have started to come up, because you’re applying your cap rate calculations to higher NOIs.

Despite that brightening picture, lenders still seem to remember when things went sideways and hotels were a tough industry to lend to. That should ease as group travel and commercial travel, some of the highest-ADR types of business, come back. Once companies begin adding employees again, travel will reenter the picture – and lending will loosen up.

Higher performance, of course, translates to higher value, and some markets do better than others. A strong flag in a good location in a gateway city with typically high barriers to entry usually equates to success – and rosy financing prospects. Even markets within markets vary. But when it comes down to soup to nuts, that individual hotel and its performance, its flag, its market, are what peoplelook at.

Getting the money is the tough part today. In a typical case, an old-fashioned owner and operator might want to build a hotel for $2 million. The performance is stabilized, driving cash flows so effectively the value of the hotel rises to $6 million over 36 months. Then the owner-operator all of a sudden has $4 million of imbedded equity into this hotel. Then he – or she – refinances this stabilized hotel, leverages it, pulls out that $4 million in equity and reinvests it in the next project. Basically, that organic growth generates a lot of that equity. If owners-operators don’t have a hotel that’s providing it, typically they have to rely on friends and family.

That’s particularly true in limited- and focused-service. Larger equity groups come into play in larger, more institutionally based transactions. But new construction will remain problematic.

Soon, you’ll see lenders being more aggressive on existing assets, maybe even starting to put their toe into the construction markets. But right now, they’ve only got so much powder they’re using; it’s easier to invest your dollars on existing assets that have stabilized performance because the values are already there.

Banks are reactive, not proactive. And they’re more likely to finance commercial real estate like shopping malls and multifamily rental units. So don’t inflate your expectations. After you do due diligence on your property, consult with a hospitality financing expert to find the right relationship between your dreams, your needs and your ability to execute.

Between the two of you, you should be able to find the way to a reality check – and to the check you need to improve your property or expand your empire. The key is to be realistic. The boom times are coming, but they’re not here quite yet.
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About Greg Morris
Greg is Co-Founder and Managing Director of Premier Capital Associates and has primary responsibilities of originations, debt and equity placement, and advisory services. He has originated and managed over a billion dollars of commercial real estate transactions including first mortgages, mezzanine financing, equity, workouts and restructures, and valuations focused primarily in the hospitality sector. Greg has been in the commercial finance industry since 1989 with a focus on hospitality beginning in 1997. He is also a CPA.

Mr. Morris previously served as Vice President of GE Commercial Finance, developing relationships with many of the nation's top hotel franchisors, ownership and management companies, providing unparalleled commitment to meeting customer needs. Greg was consistently among the top five loan originators his entire career at GE Commercial Finance and President's Club winner four years in a row. Greg has participated on several hospitality industry panels over the years and is regularly quoted in hospitality industry periodicals.

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Contact:

Greg Morris
(425) 957-0700
www.premiercapitalassoc.com

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