While we’re in a time of generally available first-mortgage financing, lender-offering packages are mostly at loan-to-value (LTV) levels of 50 to 60 percent. For those borrowers who can use this level of debt, the low interest rates and extended terms make these the salad days.
But, debt availability becomes difficult to access as LTV levels climb to +/- 75 percent. Since fresh financing at those higher levels is often necessary to make an acquisition or refinance higher-rate debt, borrowers are often frustrated in their efforts to access these “once-in-a-lifetime” first-mortgage debt opportunities. Yet, there are numerous sources of capital available to borrowers that help bridge the gap between total project cost and the equity injection portion of the deal.
Let’s take a look at some of these options.
1. Borrowing from a person who has readily available cash in his retirement account to invest. Hundreds of billions of dollars sit in the individual retirement accounts of people throughout America. Business people you know, friends and relatives are among those people with retirement accounts.
Retirement-account owners are barred from investing in activities in which they have a personal interest, but they can lend or invest money in your opportunity. These accounts are usually invested in a range of stocks, bonds and money market accounts, often yielding 5 percent or less today. So, an investment paying more than that is often an attractive opportunity to the pension fund owner, and you can create the investment vehicle to provide that option, such as those discussed in (2) below.
2. Offering junior debt or equity opportunities to private investors or banks.
(a) You could offer junior lenders, be they private or institutional, a secondary-debt position at an interest rate higher than your first mortgage. If through a bank, the terms often require principal repayment within five years. However, this may put a lot of financial pressure on your P&L (and you).
(b) You could offer equity positions in the business to investors, thus eliminating the need for any fixed principal repayment or even an ongoing fixed return-on-investment payment to the investor. Of course, that does water down your equity ownership, which you may not wish to do.
3. Doing a sale-leaseback of the land and/or building. Hotels are businesses that exist inside a real-estate envelope. You may want to keep full ownership of the hotel business through a lease contract and consider selling the building, land or both to investors and then rent it back under a long-term lease. Also, sometimes you can negotiate repurchase options in the future.
These are some ways to raise additional capital to help cover the gap between the overall cost of the hotel project and the cash you have to invest in it.