The Four Main Obstacles Facing Hotel Financing


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The hotel industry is one of the booming industries across the world with millions of hotels striving to establish a mark as the prime tourist destination. This same industry injects over billion U.S dollars yearly into the economy. However, the flourish image of hotel industry covers a multitude of financial issues, and many hoteliers will tell you that hotels still remain one of the toughest and rigorous type of asset to capitalize. As a result, many companies and individuals in the hotel business find it hard to scale heights of success without the fear of losing their brand and stringent capital expenditures. Some of the hotel financing structure include PIP-induced recapitalization or a simple financing, but rules and regulation governing hotel financing are the same on both structures.

Commercial financing on hotels has been running smoothly for the few months with emerging lenders competing to offer hotel loans. But despite the good gesture extended by some of these lenders, they’ve shifted focus and starting to focus on profit leveraging. Below are some of the main obstacles facing hotel financing.

1.Prepayment Penalties
This is one of the major limitation to hotel financing. It occurs in form of defeasance which makes it very hard for hotels to maximize the cap rate drop. Interest rates decline with penalties becoming more expensive.

2.NOI Underwriting adjustments
Financial lenders have come up with a range of underwriting tools aimed at analyzing the underwritten NOI. These adjustment tools include occupancy adjustment, Franchise, Marketing and Management adjustment and Furniture. Fixture and Equipment. Lenders playing it hard to underwrite occupancy levels even in areas with high-barriers-to-entry. Some lenders underwrite the management fees at a minimum of 3.0 percent, something that greatly affects the hotelier’s revenue.

3.Loan Terms Franchise Expirations
A newly hotelier won’t find this an obstacle if he has just entered the market but for those already the hotel industry, they find it hard securing five or ten-year long-term financing. Executing a franchise agreement is a pain for most hoteliers as they have to swallow the bitter duration that exceeds ten years.

4. Recessionary Wounds
It’s a common occurrence to see a borrower undergoing phases of bankruptcy, default, foreclosure or workout due to the current recession. In turn, lenders try as much as possible to avoid such borrowers. This move is considered to be harsh by most hoteliers as they claim recession was beyond their control.

In other instances, lenders openly decline to offer loans to hoteliers despite the recent surge in debt allowance for hotels. With lenders reluctant to offer loans, hotel financing will remain to be a mystery to some hotel owners.

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