MIAMI BEACH, Florida— The perception of unbranded boutique hotels having more risk has kept most lenders from jumping on the bandwagon and providing debt to such properties, according to panelists at last week’s fourth annual Lifestyle/Boutique Hotel Development Conference.
While the conference was held at the independent Fontainebleau Miami Beach, it’s unlikely similar hotels outside major resort and urban destinations would find the funding to be built, the panelists said.
“It’s definitely more challenging,” said Craig Greenberg, president of 21c Museum Hotels, which has one hotel open in Louisville, Kentucky, one set to open in Cincinnati and a third under development in Bentonville, Arkansas. “Most lenders we come across are very cautious, especially in second tier cities.”
Boutique properties in urban settings see challenges, Greenberg said.
“Banks aren't interested in new urban development unless it’s apartments,” Greenberg said. “Hotels are probably at the lower level of their list. And when they are interested in hotels, they are looking for national flags.”
There are about five strikes against a boutique hotel developer looking to do a project in a medium size city, he said.
Oliver Striker, director at UBS Investment Bank, said criteria for lending to boutique hotel developers are similar to that for traditional hotel developers—the depth of expertise and experience of the project’s management team is going to be a major factor in the decision.
“It depends on historical performance,” he said. “If there is a track record that indicates a process for success is in place, then the request is better received by lenders. “
Carl Kruelle, chief lending officer for Philadelphia-based Applied Bank, echoed Striker’s comments.
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| Oliver Striker of UBS Investment Bank told attendees that solid track records from a developer and an operator can greatly enhance the ability to obtain financing. |
“We look at barriers to entry and the track record of sponsors,” said Kruelle, whose bank has a number of boutique properties on its books and several more under consideration. “If you’re in the right location, the right market and have good barriers to entry, the risk (for a boutique hotel) hasn't been any greater (than a branded property).”
First timers need patience
First-time borrowers will have a tough time obtaining debt and in most, if not all, cases they will have to settle for full-recourse financing.
“Banks are very focused on the strength of who is providing that recourse or what entity is providing the guaranty if the project doesn't work out,” Kruelle said.
John Campo, president of New Orleans-based architecture firm John T. Campo & Associates, said those first-time borrowers need to take their time when it comes to finding financing.
“Approaching a mortgage broker with your first project and thinking that is the person that is going to lead you to nirvana is not right,” he said. “You have to have 50% equity plus sponsors who are very strong with liquidity, and you have to partner with a company with experience.”
“After that first one you have some track record you can lean on to refinance the deals.”
Kruelle said a first-time borrower telling a story is the toughest situation to buy for a lender.
“We would look to see what things we could do structurally to mitigate the risk,” he said.
Among the things a lender will look at is other business ventures in which the borrower has been involved. For instance, he said his bank earlier this year approved financing for an independent hotel in urban Philadelphia because the first-time hotel borrower was a catering company that has a long history and track record of success in that business.
Clear objectives
Striker said lenders are clear in what their own objectives are.
“We're underwriting the real estate … the sticks and bricks,” he said. “We're not underwriting the fluctuations of the operating business, but cash flowing at a stabilized level is preferred. That’s ultimately what we’re lending on.”
Striker said owners are cashing out to recapture embedded equity in their projects.
“What's important is they still have skin in the game,” he said. “We want the there to be some incentive to keep the owner/investor’s eye on the ball.”
Campo said all developers, regardless of experience level, need to ensure they know what tax credits are available.
“Being able to access as much free capital as possible is good,” he said. “It may add credibility with your partner, who might only have to come up with 10% equity to fund the deal because of those credits.”
The most desirable of the tax credits is historic tax credits, he said.
“They provide a good portion of the cash up front that provides equity,” he said.
“It's a very good market right now for developers if you have an historic asset,” Greenberg said.
However, Greenberg warned developers to make sure they know what they’re getting into before spending a lot of time on tax credits.
“It's very difficult to use commercial mortgage-backed securities combined with tax credits,” he said. “(CMBS lenders) don't feel comfortable with the first lien position.”
The future of financing
The panelists said the outlook for financing boutique hotels is somewhat encouraging:
- Striker: “From CMBS, what's extremely encouraging is that hotel exposure has increased to 15% to 20% in these large pools. There’s a heightened appetite for hotels. There’s a more bullish sentiment from secondary financing markets.”
- Kruelle: “The one caveat is the still somewhat uncertain economy. We have strong appetite, but we're going to be careful.”
- Campo: “Financing is available for those that meet the criteria.”
- Greenberg: “Banks that weren’t in hotel lending are starting to get into it. They might not be lending, but they're returning phone calls and that's the first step.”