Finance Q&A with Rushi Shah



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Q. I’m rebranding my hotel to a new flag. What are my financing options?

When you are moving from one flag to another flag as part of a refinance or acquisition, and add NOI as a result of the Property Improvement Plan (PIP) or by spending money on capital expenditures, a bridge loan is often the answer. This transitional financing not only provides the funds you need for the reflag, it also buys you time to ramp up under the new brand, take advantage of the subsequent higher cash flow and stabilize your position.

Typically available from private equity funds, large balance sheet lenders and some smaller hedge funds, bridge loans usually have two- or three-year terms and are priced higher than a permanent Commercial Mortgage Back Securities (CMBS) loan. This is because investors expect you to refinance once the property is stabilized. Bridge money can be non-recourse and is available for loan amounts of $8 million and higher for hotels in primary or secondary markets. Tertiary markets do not normally qualify.

Is a bridge loan my only option?
Not every rebranding scenario dictates a bridge loan. You may prefer to fund the PIP out of pocket or from your hotel’s existing cash flow. Once the rebrand is finished, you can then refinance into a permanent loan such as CMBS. You save the cost of closing both a bridge and permanent loan and can lock into long-term interest rate savings without the burden of personal guarantees.

Can I use a permanent loan to finance a property undergoing a rebranding?
Non-recourse permanent debt investors want to avoid disruptions. As a result, for a permanent loan to be an option, you must be reflagging your hotel to an equivalent or higher flag. If that flag change is also within the same franchise, investors like it even better. For example, it’s easier to move from a Hilton Garden Inn to a Hampton Inn (both by Hilton) than from Hilton Garden Inn to a Fairfield Inn by Marriott. Hotels that continue to perform favorably during the reflag will also be considered better candidates for long-term debt than those whose operations suffered.

I want to keep my current flag, but my franchise is coming due and I need to fund a PIP refresh so I can obtain a longer franchise agreement. What type of loan is best?
This is a good time to refinance to a long-term, non-recourse CMBS loan. If your hotel’s historical cash flows are solid and can support a loan amount that is significantly higher than your loan payoff, we can structure a loan where the amount equivalent to the PIP is reserved by the lender at closing and then periodically released as you complete the work.

This is a win-win-win situation for you the owner, your lender and your brand. You get your PIP financed, plus secure up to 10 years of interest rate savings at a rate that is most likely lower than what you have now and without recourse. The lender is more confident that you won’t default on the loan because you’ve committed to invest new capital in the property. Brands also prefer this structure because you obtain the necessary capital to ensure your property is fresh and well-maintained, which reflects favorably on the flag.      ■

Rushi Shah is an executive vice president at commercial mortgage banking firm Aries Capital, LLC, and president of its online non-recourse platform LendingCap Commercial. Since 1991, Aries has arranged/funded over $5 billion in financing in the U.S. and Caribbean. Shah held previous positions at Northern Trust. A member of AAHOA’s Strategic Business Advisory Committee, Shah holds an MBA from The University of Chicago’s Booth School of Business


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