Know thy lender—or risk putting your asset at risk

As we exit the pandemic, the hotel acquisition market has come back to life. Drawn in by the allure of an inflation hedge with good value relative to other asset classes, many new players are entering the hospitality space. The multiple new faces joining the fray include a surprising number of new investors and funds who often have the financial backing and an understanding of the fundamentals. But do they appreciate the nuances and fluctuations of our industry, which include volatility and a lack of liquidity during downturns? When push comes to shove, these new investors lack the experience to help their partners through troubled waters, often to the detriment of the entire project.

Although it may seem obvious, it is vital to follow the First Commandment of Hotel Financing—Know Thy Lender. Do you know exactly who you’re dealing with and what their industry track record is? Too many inexperienced hotel owners learned hard lessons in real time over the past few years. During the pandemic, too many debt funds and capital providers couldn’t help their borrowers because they simply were not set up properly and did not fully appreciate the nature of our industry.

In getting to know your lender, ask the following questions to avoid pitfalls should the economy and/or the industry take a turn for the worse.

Does the group understand how to modify loans to assist owners so they can maximize the asset’s performance? Do they allow you to manage your cash? Do they allow you to access reserves? Do they intend to service and asset manage the project through the life cycle of the investment? Do they even have the rights or capabilities to modify these investments? Hotels are operating businesses, and many debt funds and equity partners do not understand this or even hold the rights. A property starved of capital will continue to deteriorate while inexperienced groups flounder to find a solution, which puts downward pressure on an asset already in distress.

What is the group’s experience specifically within the hospitality space? Do they have a long, enviable track record of working with their partners to see deals through their entire life cycle? How many downturns have they experienced? What was their experience during difficult times? Do they have a plan in place should the economy take a turn for the worse? Do they control their capital to make decisions to help an operating business weather a recession?

A good lender understands the business and fundamentals of hospitality and can walk both sides of the fence, providing both financial assistance and operational understanding to help hotel owners through little things, like, say, a worldwide pandemic. An experienced lender realizes that hotels are not simple real estate investments but are operating businesses with new clientele daily. Hotels must meet not only guest demands, but they also must consider labor challenges and variable expenses, daily revenue management, PIPs and multiple other factors that do not necessarily occur in other segments. A good lender also has a firm grasp on such things as brand requirements, operational challenges and ongoing CapEx.

A hotel is a unique entity within the real estate space that stands apart from others. It is not an investment to be made without a strong grasp of the industry and the specific challenges hoteliers face, particularly now when so many factors are out of anyone’s control as we (hopefully) pivot further out of the pandemic. To make sure you’ve found the right financial partner for your project, it is imperative that you understand fully who your lender is, from industry-specific experience to how they performed during previous cycles. Anything less will lead to too many sleepless nights.

Mathew Crosswy is president of Stonehill Strategic Capital.