Term of Franchise Agreement – In an ideal world, your franchise agreement extends at least two years beyond the life of your loan. If this is not the case, lenders are going to expect fairly substantial reserves to cover the cost of a potential Product Improvement Plan (“PIP”) towards the end of the term of the franchise agreement. If you can extend your franchise agreement prior to getting financing, it is going to help the structure of your loan. If not, TermSt. can still get you a loan, but the terms and structure may be impacted.
FF&E Reserves – Whether or not your franchise agreement calls for FF&E Reserves, your lender is going to want them. Additionally, your lender is going to want to hold those reserves. Be prepared for a reserve amount of at least 4% of your annual revenue.
Management Fee – Your lender is likely to underwrite at least a 4% management fee. If your manager charges less, you will not get credit for that when if comes to loan underwriting.
Expense Ratios – In the CMBS world, rules of thumb mean a lot, especially to rating agencies and b-buyers. One rule of thumb that has a big impact is the ratio of rooms expense to rooms revenue. Typically, it is expected that this ratio will be at least 20% for underwriting purposes. It you do not run at 20% historically, it might make sense to see if some expenses might be better allocated to rooms expense rather than G&A, marketing or some other expense line item. Make these adjustments to your financial statements before passing them along to potential lenders.
Additionally, CMBS lenders like to see the total of the underwritten Franchise Fees, Management Expense, and Marketing Expense to be at least 12 – 16% of total revenue. If you have abnormally high F&B, there may be some flexibility in this ratio. Be aware of your ratios
Occupancy – Do you maintain an abnormally high occupancy? Typically lenders expect to see occupancy of 80% or less for most hotels (extended stay can get way with higher occupancy levels). Unless your market shows very strong occupancy and fundamentals, it is unlikely that your lender will underwrite higher than 80% occupancy. If you are considering a new loan in the next two years and have higher than 80% occupancy, you might want to start thinking about pushing your rates higher at the expense of occupancy. It may just mean higher loan dollars.
Trailing-12 month underwriting – Hotels are underwritten based upon the last 12-months to adjust for seasonality. Do not expect to get better underwriting because you’ve had a strong last three months. The best time to go to market is immediately after you’ve had a strong 12-month period.
Seasonality – One more thing about seasonality. If your hotel has highly seasonal performance, your loan may require a seasonality reserve to cover for debt service shortfalls in the lower occupancy months.
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