LAS VEGAS—At this uncertain point in the economic cycle, securing debt to develop independent hotels can be tricky, but it’s not impossible, sources said at the recent InnDependent Lodging Executive Summit.
Speaking on a panel titled “Managing to increase asset value,” Mary Beth Cutshall, SVP of acquisitions and business development at Hospitality Ventures Management Group, said it helps to have a track record of success in the independent space.
“I would say where we are right now, though, in the cycle, it’s becoming more difficult again to raise money period,” she said. “So if you are not someone … with a track record of … (executing) on the independent model—you’re not a sponsor that has done that—it can be quite difficult. You’re going to put a lot more equity down … and that affects your returns.”
Getting creative
Jayson Seidman, founder of Sandstone Hospitality Developments—who was also a lender for almost 10 years—said historic tax credits are one way he funds independent projects.
“Historic tax credits … traditionally aren’t cut until the deal is done, so I go to (certain) lenders out there who will write a check to me up front, create a bridge loan and (really leverage it),” he said.
Seidman said he’s currently focused on New Orleans because there are a lot of historic buildings and tax credit opportunities.
Cutshall added that creativity counts when it comes to getting an independent project funded.
”There’s only so much money right now, and that’s the thing,” she said. “I think a lot of lenders feel like they were overexposed and they got bitten before; they’re going to kind of pull out a little earlier now. That’s what we’re hearing, and I think your creative solution is really what it is about right now.
“That’s the game: Historic tax credits, bridge financing, mezz, something along that line. But (lenders) have pulled back dramatically because they’re expecting a shift to happen.”
Justin Jabara, VP of development at Meyer Jabara Hotels, said his company has had an easier time securing debt for independent hotels.
“We’re currently foreclosing on a portfolio of five hotels, and so we’ve secured debt for that,” he said. “It’s a little bit easier of a story; they’re cash-flowing. On the ground-up stuff, we have two handfuls of ground-up properties at all different stages of development, and it really comes down to the local bank, right? So local person, local bank, having that relationship, and then they do sponsor.
“They want to know who we’re doing business with, who’s the operator and then ‘sell me the story.’ And the groups that really go to the banks with the best story … those deals get done.”
Chris Green, principal and COO of Chesapeake Hospitality, agreed that it’s important for a project to stand out when seeking financing.
“It takes this passion to really get it done and a sponsor with a good story … because it’s not going to be easy to get done; it takes more work,” he said.
Harper Stephens, head of business development at Charlestowne Hotels, said boutique hotels can be attractive to private equity firms looking to diversify their portfolios.
“We see private equity, family offices, people who are trying to get away from the brands and have something unique for their investors to raise capital, and a lot … really look for boutique hotels,” he said.
Profitability
Independent hotels can be profitable, but Cutshall said she wonders what will happen to the segment during the next down cycle. In the past, branded properties have sometimes “slipped less” than independents during a downturn, she said, but this time could be different.
“The reason I say that is that the internet is such a compelling (part) to it now for business in general and marketing, and independent properties have really come into their own,” she said. “You have all these other factors like Airbnb and HomeAway and VRBO, and what kind of impact that might have. And then I throw on top of that, you’ve got the Marriott/Starwood merger, and now all of a sudden, you have sister properties in your comp sets that didn’t used to be sister properties (during the last downturn). What impact will that have? Will cannibalization actually increase more rapidly?
“I think what could happen next time may be different than (what’s) ever happened before.”
Green said “there’s no free rides” when it comes to making your hotel profitable.
“You’re going to have to spend money on sales and marketing; you’re going to have increased labor … marketing, social media—all the things you have to do to keep an independent, especially, (profitable),” he said. “I have a 330-room independent in midtown Atlanta, a very well-known property, but it takes a ton of work to keep it at 75% (occupancy).”
Conservative projections
It’s important to be conservative when making projections for independent properties, the panelists said.
“Indies ramp up a little bit slower,” Cutshall said. “Make sure you’re putting that in your projections; don’t be too aggressive right out the gate, especially when you’re talking to a lender, and especially when there’s a lot of food and beverage. Be conservative in your projections … it might take another six or eight or 10 months to kind of get to that freezing altitude. With a brand, you’re flipping a switch.”
Seidman added it’s also important to be “conservative with underwriting.”
“When I submit my deal package to a lender, I will not show pro forma that shows F&B at anything greater than maybe 25% … and my rate, everything … They have to see this as a hotel, first and foremost,” he said.