Quantifying the lender mindset leads to successful results

Photo credit: Getty Images/psisa

As a borrower, your goal should be to understand how your lender thinks. With hotel financing more than with other commercial real estate types, it pays to spend time making sense of how your hotel will be perceived. Given that we are late in the financing cycle, one might think that everything is financeable, but that’s not the case. Even if it were, better terms are always available if the lender-borrower match is arranged. Ensuring a congruent relationship is essential.

First, focus on stage. This determines the basic lender type, which informs the boxes they’ll look to check. If you own dirt and will be building a hotel, your lender will focus heavily on you and your experience. They’ll want to know that you’re recycling a business model you’ve been successful with in the past. They’ll want to ensure your project is feasible, as determined by a third party. They’ll want to make sure you have the financial wherewithal to fund the equity even under a stress-tested scenario. They’ll dig deep into demand drivers to ensure that projections can be met. And they’ll focus heavily on leverage. Knowing this can help borrowers present deals to lenders in a comprehensive and quantified way. Lenders expect borrowers to know this, and not focusing on these details can be detrimental.

If you’re financing an existing asset, you’re either looking for stable nonrecourse debt or some type of floating rate option to fund upside. On the nonrecourse side, the focus will be heavily geared toward the asset and its consistency. The lender will be less focused on the borrower and more concentrated on the market, new supply, Airbnb risk, etc. Recourse deals often involve some type of business plan for the hotel, and thus the lender will be dually focused on feasibility and borrower capacity.

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The key is to make sense of the lender’s key decision-making points. Lenders, despite rarely using statistics or predictive models to their benefit, have a set of items they like to see before saying yes. Whether they are reasonable or not, borrowers must market their deals knowing that a lender will be homing in on these points. For each deal, it’s best to get inside the mind of the lender before marketing a transaction. Presenting the right materials is important, especially when a quick glance often is all you get.

Hotels are a special case for lenders, and this “get into the head” of your lender philosophy is even more pronounced than it is for other asset classes where the boxes are easier to understand. Hotels are an operating business, often with highly qualitative operating characteristics. Borrowers must focus on quantifying these characteristics for lenders who are not focused only on hotel lending so they can compare to a deal type they often are more accustomed to. Borrowers should quantify everything they can so that qualitative “stories” about their hotels can be backed up with credit-committee-presentable evidence.

Zak Selbert is founder of Vista Capital Company.

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