When several mortgage lenders tell you that they’re interested in your hotel loan, and they offer you a pu-pu platter of financing options, you start to get the sense that hotel lending may be heading in a useful direction. And, you are certainly right.
The grudging 50 percent LTV (loan-to-value) mortgage offers of the past several years are now moving up to more useful 60-percent-plus levels. You can get readily available fixed rate debt for 10 years at 5-percent-plus/minus, and in the fours for five-year loans. Or, you can do variable rate borrowing at 200–275 basis points above various relatively low benchmark rates. In any case, lenders know that they must offer 20- to 25-year amortization schedules with debt due in no less than 10 years, or they are likely to lose the deal.
Often, we ignore the favorable tax treatment that hotel investors deservedly receive, especially when we consider the higher income tax levels now being imposed on financially successful citizens.
Think about it. Let’s say you buy a hotel for $5 million and put another $1.5 million toward a renovation. Of the initial purchase price, it’s likely that you’d allocate something like $3.2 million to the building’s depreciable basis, $1.3 million to FF&E depreciable basis and $500,000 to the land. That means annual depreciation write-offs (against otherwise taxable income) of $300,000-plus—and that’s prior to the write-offs generated by your renovation, which should give you another $250,000 per year. All told, assuming no accelerated depreciation or expensing of FF&E, you’re looking at roughly $550,000-plus per annum of depreciation for the next seven years that you can use to shelter otherwise taxable income; it does drop off after that, as your initial pop from FF&E depreciation disappears. In the 40-percent tax bracket, that’s worth $220,000 yearly.
Wisely invested modernization funds are useful three-fold: (1) you’re probably borrowing 60 percent of those funds from the lender since the CapEx investment would be included in the overall project cost against which the lender is financing 60-percent-plus; (2) the cosmetic and equipment improvements almost always wind up with about a 30-percent-plus return on investment; and (3) if hotel investing is your main vocation, you can use the potential tax losses created by the investment to offset taxable income at other of your hotel ventures.
All in all, it’s a pretty good time to be buying hotel assets that are able to be leveraged at historically outstanding moderate interest rate levels. Also, taking the tax benefits of hotel investing into consideration, especially given ever-higher income tax burdens on financially successful people, we ought to be pleased to be able to invest in the lodging business right now.