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Hotel Property Improvement Plan(PIP)

Navigating the Financing Landscape for Hotel Property Improvement Plans

As the hospitality industry continues to improve and recover from the recession, Property Improvement Plans (PIPs) have become a priority for hotel owners once again. Whether the goal is to simply improve the property to remain competitive in the market, adhere to current company branding standards, or to complete a brand conversion (or "reflagging") of your hotel, one thing is certain: PIPs can create a major financial burden. Unfortunately, noncompliance with a branding company's PIP is quite risky. Not only could the hotel lose their brand affiliation, but doing so could also cause a loan default if there is a breach of loan requirements.

Financing Options for PIPs

Despite the changes in PIP requirements, hotel owners can breathe a sigh of relief knowing that the lending environment is becoming increasingly flexible in providing more financing options. In fact, owners that believe selling the asset is their best option may be surprised to find out that there are financing opportunities that would not only allow them to keep the hotel, but do high LTV cashout refinancing.

Low-Cost Fixed-Rate Financing

Most owners focus on the daily operations of their businesses, and unless they pay attention to the capital markets, they may not know that they now qualify for low-cost fixed-rate financing that would cover part or all of the PIP. In this competitive lending market, cash-flowing assets may be able to reap financing proceeds at a 11 to 13 debt yield. This option would give the owner enough capital to complete the renovations, with the majority of the costs financed at low, senior mortgage rates on a non-recourse basis.

Subordinated Leverage

However, some hotel owners are not viable candidates to add new debt and may not meet the eligibility requirements to take on a new loan. In this situation, owners can consider subordinated leverage, typically structured as a mezzanine loan. Investment institutions that offer this option will structure their position behind the existing mortgage, with the difficult aspect being the lender's requirement of the loan to be co-terminus with the maturity of the senior mortgage. Although this option may require the hotel owner to jump through a lot of hoops, it provides a good solution for hotels that have an impending PIP deadline.

Combining Low-Cost Senior Mortgage and Mezzanine Financing

Lastly, the best option for a hotel owner may be to take the best of both worlds, by combining a low-cost non-recourse senior mortgage with a mezzanine component. Not only would this solution provide all the necessary financing for the PIP, but it would also clear existing debt. Hotels located in a market with limited supply growth potential and that can prove their Net Operating Income(NOI) will vastly improve post-renovations are the ideal candidates for this option.

In conclusion, as the hospitality industry continues to recover, hotel owners have a variety of financing options to consider when tackling their Property Improvement Plans. By exploring these options and understanding the lending landscape, owners can find the right solution to meet their financial and operational needs.

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