The ins and outs of the investor-lender relationship

Given today’s strengthening economic environment and attractive operating fundamental trends, investors seeking premium yields are increasingly taking risks through value-added investments. Investors must be diligent evaluating lenders for these projects, and consider factors including: a firm’s experience within the hospitality sector, track record and understanding of adding value in hospitality transactions.

Experience in Hospitality
Perhaps the most important consideration lies in the lender’s knowledge of, and experience in, the industry. Deal factors perceived as risk by generalist lenders may be viewed differently by those with deeper industry perspective. Lending on the unique combination of real estate investment and an operating business driven by daily rents is not “one size fits all.” Specialized hospitality lenders have the experience to understand a hospitality investment from the inside-out, giving them the tools to work hand-in-hand with borrowers as they ensure a successful capital structure for all market environments.

Relationship Focused/Cycle-Tested
Owners should seek lenders who have demonstrated commitment and success throughout all economic cycles. In a strong economy, generalist lenders enter specialized sectors such as hospitality; however, in an economic downturn, many of these lenders will abandon hospitality for safer investments, or will stay on the sidelines. Specialized hospitality lenders remain active in all cycles if they have a long-term perspective, strong balance sheet and pursue well-conceived projects. This commitment makes the relationship between lender and borrower, as opposed to economic timing, the nexus of a financing.

Understanding Value-Added Investment Strategies
Value-added strategies require each participant in the transaction to understand market-positioning and operational opportunities that will create value for the asset. Perceived value by generalist lenders may be materially lower than that of a specialized lender, resulting in either a lack of interest, or deal terms that don’t appropriately address the risk of the project or the long-term needs of the borrower. Working with a lender who understands these situations results in debt structures that meet borrower objectives and position the transaction for success.

Through the remainder of 2014 and into 2015, hospitality market fundamentals are expected to remain strong. Marrying a risk-acceptant investment approach with a lender who has hospitality experience, resilience through economic cycles and the ability to see value in investment strategies, is critical to achieving success and attractive returns on hospitality investments.