Where to Find Financing For Boutique Hotels
Conference Panelists Say It’s Available, But Costs May Be Higher
It’s not easy, but finding financing for boutique hotel projects can be done, said members of a general session panel at last week’s Lifestyle/Boutique Hotel Development Conference in Miami Beach. Lenders see higher risks in lifestyle hotels, particularly non-branded ones, and the cost of capital may be higher, but money is available.
“To say there is no money for boutique hotels is false,” said Bill Sipple, managing director of HVS Capital. “It’s all about perceived risk on the part of lenders. Some of them view an independent boutique hotel or one that’s part of a newer boutique brand as a higher risk. The result is a higher cost of capital or higher underwriting standards, or both.”
The uniqueness of most boutique hotels can be a double-edged sword when dealing with money sources. On one hand, said the panelists, a one-of-a-kind property with a passionate owner/developer can be viewed as an intriguing investment, but that scenario also comes with risk.
“We often describe a boutique as a unique asset and a reflection of someone’s unique vision, but some lenders get nervous when they believe the deal only makes sense when that person is involved in it,” said Ormend Yeilding, partner with the Orlando-based law firm Lowndes, Drosdick, Doster, Kantor & Reed. “You’ve got to reassure [lenders] that even in the worst-case scenario, they’ll be able to get out of the deal or dispose of the property.”
Those fears can be assuaged, in part, by demonstrating the experience and strength of the borrower’s organization, noted Frank Nardozza, chairman & CEO of REH Capital Partners. “The fear some in the capital markets community have about boutique hotels is how they will be able to get access to information about a property, especially if problems appear,” he said. “The borrower needs to show its infrastructure, its accounting resources and the channels of marketing available to the hotel. That can go a long way to create more comfort for the lender and to dispel the notion boutique hotels are Mom-and-Pop operations they won’t be able to understand.”
Yet, in a downturn, the independence of boutiques can be a plus in the mind of lenders. As Nardozza noted, non-branded properties can be more nimble because they’re not constrained by staffing issues and cost structures associated with chain-affiliated hotels.
And said panelist Michael Sullivan, “Location is also very important. Sullivan, who at the time of the conference was managing director and head of hospitality for Gemini Real Estate Advisors (he’s now managing director of David Landau & Associates), said Gemini was involved in financing of several boutique properties in New York City where they were able to demonstrate to lenders that a flag wouldn’t add much to the property in terms of occupancy and rate because of the robust performance of the market.
“We convinced them the projects would perform better because since they wouldn’t have the costs and standards associated with a brand they can move more dollars to the bottom line,” he said. “But for some other projects in some other markets, lender insist on a flag. The market makes a difference, as does the sophistication of the lender and its ability to appreciate the differences [between markets.]”
One option to take perceived risk off the table is a soft brand, such as Marriott’s Autograph Collection or Choice’s Ascend Collection. “Part of the reason lenders like brands, even soft brands, is it’s another set of eyes keeping tabs on the owner and making sure standards are being maintained,” said Yeilding “And while soft brands don’t have anywhere near the same kind of controls as do full franchise agreements, from the lenders’ perspective it’s still an advantage to have that third-party making sure certain standards are in place.”
Even with lenders who understand the boutique concept and its advantages, borrowers in this segment need to be prepared for more stringent loan terms and higher costs, said several on the panel. One executive suggested total financing cost for a generic boutique non-branded hotel is about three percentage points higher than for a traditional branded hotel.
“You don’t even get to the table unless you have between 12% and 14% debt yield on existing cash flow on an unbranded boutique property unless it’s in a primary market like New York and unless you have demonstrated consistent cash flows with minimal impact during the downturn,” said Sipple of HVS Capital.
The 3rd annual Lifestyle/Boutique Hotel Development Conference was held at the Fontainebleau Hotel in Miami Beach. Lodging Hospitality and HVS Hotel Management are founders and producers of the event. The School of Hospitality Business at Michigan State University is the conference academic partner.
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