February 8, 2021 12:14 pm
Over the course of the past 9 months or so, most of us have seen the dramatic effects of Covid 19 on our hospitality businesses. Most of our clients and friends have experienced significant declines and revenue, with the accompanying declines in cash flow. However, within our brokerage practice there have been pockets of activity, especially for those listings being offered at $5MM and under. Therefore, if you are an owner or a buyer of such assets, this article may apply to you. We have marketed and sold a number of deals during the pandemic, and therefore we also have a unique perspective on the hotel financing markets since the onset of Covid 19.
For the purposes of this article, we will discuss our recent experiences in getting deals to the finish line, especially as it pertains to financing for those projects that tend to be owner or partner operated and less than $5MM.
First of all, while it is true that many, many community and regional banks are out of the hotel lending business, at least temporarily, there are still lenders out there. For these smaller deals, SBA support is almost universally required, unless there is a very high equity percentage contribution. Secondly, their appetite to finance will largely depend on whether the deal cash flows, now. If the deal doesn’t feature reasonable cash flow, then it is a whole other ballgame, and we will have some thoughts on that, too, in a later post.
For those of you in this price range, buying or selling a hotel is not an everyday experience (notwithstanding buying one in a pandemic). The first item you will need to get used to is the scrutiny by the lender, of you and of the property. To assist your interaction with the lender, the following checklist will help you prepare.
- Prepare a resume of yourself (and your partners). Make sure you list ALL of your partners and any operational experience in the hotel business. If you are a first-time buyer, that path just got tougher, so you would describe any experience that you have that parallels the hotel business, including any job where you have worked with the public or handled staff. Also include any awards & recognitions obtained through work, school, or volunteering.
- Decide on the ownership structure……….that is, there can be advantages for minority or women owned businesses.
- Develop a personal financial statement and include everything on it. You can find one on the SBA website. All partners will need to do the same.
- Assemble the past 3 years of your personal federal tax returns (electronic format) (and your partners).
- Assemble the past 3 years tax returns of any other business holdings, where you (and your partners) own 20% or more of the business
- Even if your targeted acquisition cash flows, be prepared to put together a 3-year proforma (projection of income and expense), in case it is requested by the lender. Make it conservative from the revenue standpoint, but also recast those expenses, such as labor, to show where you will save on the expenses (and increase cash flow).
- Be aware of the acronym DCR, which is the acronym for Debt Coverage Ratio. DCR is the ratio of annual net income to annual debt service. For instance, if the property’s annual net income (income minus expenses, before depreciation, amortization and income tax) is $150,000 and the annual debt service (interest & principal) is $100,000, then the DCR is 1.5. That number represents the “cushion” between break even on the debt payment. It will be an important number to the lender, and will vary from lender to lender.
- Develop a business plan for after the purchase. (Create a list of what you will do to grow the business, to save on expenses, to become part of the community). You don’t need to engage a national marketing firm…….that is, just list practical and common sense activities that bring attention to your hotel. We can certainly assist you in that effort.
- If your lender requires SBA or USDA support, make sure you visit those particular websites and familiarize yourself with the process.
- If you have existing income that will continue beyond the acquisition of the hotel, it will certainly help your effort, so be prepared to describe other sources of income.
- Whether your target is a franchise hotel or an independent, be prepared to tell your lender how you will pay for any improvements you plan to make after the acquisition. Of course, with a franchise, you will have a PIP with timelines to deal with, and the lender will want specifics. You will have a bit more flexibility with an independent hotel, but the budget will still be important.
If you perform these tasks BEFORE you meet with your lender, you will create a perception of preparedness where your lender will much more comfortable in moving forward with you as a borrower. Keep in mind that if you do move forward and in quoted price range, the loan will likely need SBA support, so you are just getting started in submitting the paperwork that will be required.
As a corollary, many of our assignments include properties where the historical revenue (pre-2020) was attractive, but now, the revenue and cash flow has been greatly diminished during Covid. Some of them could even be considered distressed, even if temporarily. We will discuss the financing on those types of properties in our next post.