By Ryan Bosch
It’s no secret that lenders don’t like to take risks. Today’s lending environment is complicated and hotel development projects are expensive. There’s only so much capital out there and certain factors—like brand—can make or break a loan.
Historically, boutique and independent properties have had fewer opportunities to access capital compared to branded hotels with established track records. Unbranded properties are simply higher risk than established, reputable brands. That said, brands can have their own pros and cons, and depending on the development project, a flag may matter more than you think.
Here are five unexpected ways brand affiliation can influence lending.
1. The more desirable the brand, the more competitive your terms.
Not all brands are equal in the eyes of lenders. There’s more interest in brands that have a proven performance record. That increased interest means there’s more competition among lenders for a particular project, which can distill down into better terms for the developer who is shopping the deal. If 10 lenders are interested in a project, there are many opportunities to negotiate terms. And while some brands will have 10 lenders interested, others may only attract two or three. Independent properties might only have one lender interested, depending on the market. There’s just more capital available for those stronger, reputable brands.
2. Parent brand can be more important than the individual flag.
While certain flags can offer lenders a level of confidence, it’s often the big name behind that flag that really seals the deal. Big brands have the infrastructure to support their properties, and the most successful brands in our industry are the most appealing brands for lenders. This is one of the reasons that soft brands have become so successful—they allow for a certain level of creative freedom but with the support of a proven brand.
3. ‘New’ isn’t necessarily best.
There are new hotel brands hitting the market all the time. These brands are usually launched under established hospitality companies with a lot of fanfare, but that affiliation can only carry the new brand so far. New brands are unproven and are therefore a riskier bet for lenders. Typically, a brand has to hit a certain point of momentum before it becomes attractive to lenders, with about 25 open, operating and thriving hotels to show a track record of performance.
4. Brand affects your exit strategy.
A solid exit strategy is a critical component of any development plan. There’s always going to be more appetite for branded properties—especially high-performing branded properties. Top brands can compel a premium price, and there is interest in both the lending and purchasing markets for properties with these affiliations. With a bigger pool of potential buyers, lenders see the higher probability that a loan will be paid off, which makes a brand more attractive still.
5. Mileage will vary by region.
There are markets where brand affiliation doesn’t matter as much. These are areas with extremely high barriers to entry and a strong track record of independent and boutique properties with solid performance and high occupancy. An example of such a market is Napa Valley. There’s not a lot of supply, and it’s a notoriously difficult place to develop a hotel. A deep understanding of a market is necessary to choose the flag that would perform best.
Ryan Bosch, principal at Arriba Capital, is a seasoned expert in hospitality debt and structured finance, managing a portfolio exceeding $2 billion across 140 deals.
This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.
