Why Now Is The Best Time To Finance
By Dr. Donald W. Wise, Consultant with Strategic Solution Partners
Winter is officially over, and although the capital markets for hotel and resort refinance, acquisition and new-build construction lending have been frozen, they have been stealthily thawing out since the first of the year.
Since the start of the pandemic, short-term bridge and renovation loans for the hospitality sector have been mostly non-existent and full recourse. Hospitality lending pencils are by no means all the way up, but the road to recovery has started with a phrase that has not been heard since before the Great Recession: non-recourse debt.
What is Non-Recourse Debt?
Non-recourse debt is a loan secured by collateral, typically real property, but for which the borrower has no personal liability. Should the borrower default on the loan, the lender can seize and sell the collateral but cannot come after the borrower for any difference. In other words, the lender can only recover the value of the collateral, in this case the hotel property. As a result, non-recourse debt is attractive to investors because it limits personal risk.
Today, borrowers can access single-digit interest rate, non-recourse acquisition, refinance, and new build and renovation construction funding for projects requiring a minimum of $25MM up to $100MM+ for a total of 75% loan-to-cost or loan-to-value on a non-recourse basis.
Why Pursue Non-Recourse Financing Now?
1. Minimize Guest Impact
While the historically low occupancy levels hotels have experienced as a result of the pandemic have been painful, there is no better time to renovate an existing property or build a new one than when the guest experience will not be negatively impacted.
2. Prepare for the Return of Demand
Meanwhile, any new build hotel or resort will not come online for 18 to 30 months, or between the first quarter of 2023 and the third quarter of 2024, well in the rear-view mirror of the effects of COVID.
The majority of hotel owners and operators will be so thinly capitalized over the next 24 to 30 months that they will not have the financial capacity to do renovations, and many will be unable to comply with brand standards and Property Improvement Plans (PIPs). As a result, deferred maintenance will affect the online reputations of these non-renovated hotels.
With negative reviews, these hotels and resorts will lose market share, occupancy, and average daily rate, so to compete effectively, many of them will find their only competitive advantage is a reduction in rate.
Newly opened hotels and resorts, like the newest restaurant on the block, will be fresh and exciting.
3. Update Hotel Design for Post-Pandemic Needs
New build hotels and resorts can incorporate state-of-the-art ventilation and HVAC systems that are safer and better at containing the spread of airborne viruses and other harmful organic materials and pathogens. These properties can design common areas, restaurants, and bars with social distancing in mind, and use touchless technology for check-in, ordering, and payment.
In short, investing in hotel facilities – whether through new construction or renovation -- will help our industry drive occupancy levels, rates, and market share to drive the rebound.
There is a light at the end of this long and unknown tunnel – and it is not a freight train but an exciting new world of the next generation of LEED-certified and appealing hospitality experiences.
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