Lodging Hospitality: Where to Find Financing For Boutique HotelsOctober 26, 2011
DLA’s Michael Sullivan discussed the challenges in finding financing for boutique hotels as a panelist at the Lifestyle/Boutique Hotel Development Conference in Miami Beach. The story is featured in Lodging Hospitality, written by Ed Watkins.
It’s not easy, but finding financing for boutique hotel projects can be done, said members of a general session panel at last week’s Lifestyle/Boutique Hotel Development Conference in Miami Beach. Lenders see higher risks in lifestyle hotels, particularly non-branded ones, and the cost of capital may be higher, but money is available.
Bill Sipple of HVS Capital says financing for boutique hotels is available but it comes with a perceived risk.
“To say there is no money for boutique hotels is false,” said Bill Sipple, managing director of HVS Capital. “It’s all about perceived risk on the part of lenders. Some of them view an independent boutique hotel or one that’s part of a newer boutique brand as a higher risk. The result is a higher cost of capital or higher underwriting standards, or both.”
The uniqueness of most boutique hotels can be a double-edged sword when dealing with money sources. On one hand, said the panelists, a one-of-a-kind property with a passionate owner/developer can be viewed as an intriguing investment, but that scenario also comes with risk.
Ormend Yeilding said lenders like brands, even soft brands, because they feel it gives them another set of eyes monitoring property performance and standards.
“We often describe a boutique as a unique asset and a reflection of someone’s unique vision, but some lenders get nervous when they believe the deal only makes sense when that person is involved in it,” said Ormend Yeilding, partner with the Orlando-based law firm Lowndes, Drosdick, Doster, Kantor & Reed. “You’ve got to reassure [lenders] that even in the worst-case scenario, they’ll be able to get out of the deal or dispose of the property.”
Those fears can be assuaged, in part, by demonstrating the experience and strength of the borrower’s organization, noted Frank Nardozza, chairman & CEO of REH Capital Partners. “The fear some in the capital markets community have about boutique hotels is how they will be able to get access to information about a property, especially if problems appear,” he said. “The borrower needs to show its infrastructure, its accounting resources and the channels of marketing available to the hotel. That can go a long way to create more comfort for the lender and to dispel the notion boutique hotels are Mom-and-Pop operations they won’t be able to understand.”
Frank Nardozza said non-branded properties can be more nimble because they’re not constrained by staffing issues and cost structures associated with chain-affiliated hotels.
Yet, in a downturn, the independence of boutiques can be a plus in the mind of lenders. As Nardozza noted, non-branded properties can be more nimble because they’re not constrained by staffing issues and cost structures associated with chain-affiliated hotels.
And said panelist Michael Sullivan, “Location is also very important. Sullivan, who at the time of the conference was managing director and head of hospitality for Gemini Real Estate Advisors (he’s now managing director of David Landau & Associates), said Gemini was involved in financing of several boutique properties in New York City where they were able to demonstrate to lenders that a flag wouldn’t add much to the property in terms of occupancy and rate because of the robust performance of the market.
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