Hotel investors who are seeking financing for new hotel construction or for acquisition and remodel of an existing hotel will certainly face challenges in today’s market but can still secure a great deal with the right approach.
What is a Hotel PIP?
Hotel investors who are pursuing a partnership with an established hotel brand (referred to as a “flag” in the industry), such as one of the many hotel flags from Marriott, Hilton, Wyndham, or Choice Hotels, will need to work to execute on a property improvement plan (PIP) to meet and uphold the flag’s standards.
The flag will take the lead in providing the hotel investor with a PIP, which will cover everything from the building exterior to the furniture inside. The investment amount needed by the hotel investor will be represented by the “cost per key” (where key = room, and the total investment needed is calculated by multiplying the cost per key by the total number of rooms).
Once the hotel investor has the PIP in hand, it’s time to explore financing options. Our hotel financing experts at Lincoln James Capital have outlined a few important recommendations below on how to fund your PIP. (Note – The same recommendations apply to hotel investors building or buying an independent hotel.)
Also – be sure to download the Insider’s Guide to Hotel Financing in a Challenging Market (featured at the most recent AAHOA Convention).
Move with a sense of urgency
At the time of this blog post (May 2022), rates are rising, and credit policies are tightening. This is a trend that will continue for at least a few years, which means that time is of the essence. Pursue your financing with a sense of urgency so that you can take advantage of lower rates.
Prepare a strong financial package
Prioritize liquidity in your financial package. When wealth is tied up in real estate or other illiquid assets, it creates challenges with financing. The more cash or near-cash assets you have available, the more flexibility you will have with financing options.
Consider multiple types of financing
While hotel investors should pursue financing with a sense of urgency, we do not recommend going directly to a bank or only considering one type of financing. While it may seem like the “fast” way to get a deal done, it can create a setback for the hotel investor financially. An experienced capital markets advisory firm will help you prepare effectively, move quickly, and explore multiple types of financing.
Explore combinations of financing options
A well-developed capital stack will usually have multiple types of financing, helping hotel investors better manage their financial needs. Common hotel financing options include:
- Small Business Administration (SBA) Loans
- Bank Loans
- Life Companies
- Bridge Loans
- Commercial Mortgage-Backed Securities (CMBS)
The hotel industry is capital-intensive but has historically provided excellent returns on investment. If you plan to pursue financing for a hotel investment, schedule some time with the experts at Lincoln James Capital to become introduced, begin developing a relationship, and answer any questions you may have.
Don’t forget to download the Insider’s Guide to Hotel Financing in a Challenging Market (featured at the most recent AAHOA Convention).