There’s no denying it: The transactions market has changed and hotel developers are increasingly looking to foreign capital, bank debt and life companies as sources of financing. But Andrew Cohan, managing director of Horwath HTL Miami, found an innovative financing source in the form of the federal government to back a project that qualifies as a rural resort development.
Cohan talks to HOTEL MANAGEMENT about the project, why rural resort development is even relevant in a market where RevPAR is decelerating in many urban markets, and how the project qualified for a USDA loan.
HM: Why is now an optimal time for rural resort development, especially when RevPARs in urban hotels are decelerating?
Cohan: Prior to 2009, people would build resorts with big marinas, a golf course and lots of infrastructure. All of these components would require $100 million in investment before anyone would see $1 of revenue. Today, what we’re seeing is that people want more intimate, personal experiences. Since so few can afford to build large resorts anymore, it’s easier to finance smaller projects. In a market like Miami, development may cost $400 per square foot, but those same costs for the same type of product will be substantially lower in Chattanooga, Tenn. So, what used to be a $100-million project in a market like Scottsdale, Ariz., becomes a $30-million investment in a rural resort that’s within driving distance to five major cities; and it becomes a Thursday-to-Monday getaway with lots of activities for guests.
Sometimes putting a resort in places where there were previously just cabins or vacation homes can really enliven an area. Places that had their peak in the 60s and 70s are often still beautiful destinations, but they haven’t yet been reinvented and this is a means of reinvigorating older destinations with new life. Somewhere that’s a two- or three-hour drive from home for a two- or three-day trip makes sense because no one has time anymore. These are all trends that are converging favorably to adaptation by the financial market. Very few investors can risk a half billion anymore.
HM: What makes for a successful rural resort?
Cohan: Rural projects are more common than you think. Most ski resorts are actually in rural locations. Then there are also yoga retreats and destination spas, such as Canyon Ranch in Massachusetts. Often they serve as weekend getaways to people in nearby urban areas.
In the Southeast, where the particular property I worked on is located, there aren’t quite as many resorts because the season isn’t long enough to attract a branded hotel. But if you have a few cabins around a lake in North Georgia where it gets very hot in the summer, a few days away can make a difference. The property that we’re working on in North Carolina falls in that category. There are many golf communities with vacation homes in the area, but this resort will offer many outdoor activities for more active, younger families. The resort will feature between 100 and 150 guestrooms and an additional 20 to 30 vacation residences, and should be livelier than the typical vacation home community.
There are 20 million people in the surrounding areas and it’s a two-to-four-hour drive from the closest major metro markets. People in Georgia, North Carolina, Virginia and Indiana aren’t daunted by a trip of that length. Plus, while North Carolina is traditionally a drive market, there’s more and more flight connectivity today. With expanded accessibility, there’s also a good deal of hotel development happening nearby and this resort isn’t far from a large city. But the town itself has about seven or eight thousand full-time residents. So the project qualified as “rural.” But you don’t see a lot of branded hotels because of the short season. So while there’s more activity than we realize in some of these areas, we don’t hear a lot about them because they’re usually family-run, smaller facilities and no Marriotts or Hiltons. So it seems that the drive market is the primary audience.
HM: How did you learn about the USDA loan program as a source of funding for rural resort development?
Cohan: I happened to be working on another resort property in southern Arizona that was part of a very rural ranch; the client had purchased a golf course with a small lodge that had a bit of a legend to it because John Wayne and some other Western Hollywood stars had stayed there. So the client wanted to create a spa resort getaway and another consultant on the project mentioned this USDA loan program. I had thought that it was just for beef, but as it turns out, the program is designed to help facilitate commercial lending in rural areas where it will help create jobs in the local community. It’s really an interesting program that’s meant to keep people employed and to stem migration from rural areas into cities.
Also, our Atlanta office had a client a few years ago who financed a 24-room expansion of their mountain resort, located about two hours outside of Atlanta, partly through a small business loan and partly through a USDA loan.
HM: How does a resort project qualify for the USDA loan program?
Cohan: Most any type of business that is planning construction, expansion, repairs, modernization and even development can be eligible for the program, which is great for our industry, especially since new hotel development can be the hardest to get financed.
USDA approves $4.7M loan for Williston hotel near Oil Patch | Flickertales from The Hill | http://t.co/N1JY2F9— Kristen M. Clark (@ByKristenMClark) January 15, 2011
The program can also be used for the purchase of equipment, machinery or supplies. The program’s website allows you check to see if your zip code is considered rural and any individual, public and private organization as well as any Federally recognized tribal group is eligible to apply. USDA offices can be reached at the following website: http://www.rd.usda.gov/contact-us/state-offices. There are no restrictions on the size of the business that can apply. There is also a sliding scale guarantee, depending on the size of the loan, so the smaller the loan, the greater the percent of it guaranteed: 80 percent is guaranteed for up to $5 million; 70 percent is guaranteed on loans from $5 to $10 million; and 60 percent is guaranteed on loans from $10 to $25 million. I think it’s fairly comprehensive because if you have a new development capital stack, you might go for a loan that’s half of the development cost. So if you borrow $25 million, this will cover up to $50 million. You would apply for a loan at the bank as you normally would and you’re still rated on your credit worthiness and the project’s likelihood of success. But the bank knows that worse comes to worse and you don’t pay, they’ll still get that guaranteed percentage from the USDA. It minimizes a lot of the risk of a local, regional or national bank to finance the project.
Andrew Cohan is responsible for overseeing Horwath HTL’s business development and consulting activities in Miami. He can be reached at [email protected].
Horwath HTL (Hotels Tourism and Leisure) is a consulting specialist in the hotel, tourism and leisure industries.