How to use non-recourse, long-term financing for more successful succession planning.
By Rushi Shah
Maybe not today or even next year, but sometime in the next 10 years you may decide to turn the helm of your hotel over to the next generation, or divest your property. Regardless of your exit strategy, it’s impossible to predict what market conditions will be when you make the transition, or whether your successors will flourish or falter.
Fortunately, there are financing choices you can leverage today that make it easier to hedge this future uncertainty, position your legacy for success, and protect you and your family from unnecessary risk in the future.
Remove the Risk of Recourse
With a non-recourse CMBS loan, other than bad-boy carve-outs that trigger in the event of borrower fraud, you are not required to personally guarantee the loan. Subsequently, when things go wrong outside your or your successors’ control, only the property is on the line to satisfy the payments. Even if global and domestic economic conditions worsen and demand drivers evaporate, your personal assets will not be put in jeopardy to cover the debt.
This insulation is especially critical as brand proliferation continues to accelerate. Hotel brands seem to have an insatiable appetite for growth in a market regardless of the consequences. As a Hampton Inn owner on one side of the block, you may end up with a Hilton Garden Inn or a Tru by Hilton cannibalizing your business just across the street. Although you can’t control the brand, with a non-recourse loan you can minimize its impact on your personal balance sheet.
As an example, one of our recent clients was looking to turn over the management of his Carolina and Florida hotel properties to his two sons, who had just completed higher education and were looking to settle down and take the family business to the next level. We advised him to package up the properties and refinance with a permanent long-term, non-recourse loan. This solution allowed him to free up a large chunk of cash from the portfolio and tempered his risk as his children learned the ropes and deal with the challenges of running a management company.
Go Long to Save Longer
Fed interest rate hikes are the new norm, and this is likely to continue. Putting your financing to bed now at today’s low rates for as long as possible, will ensure you and your family rest easy later. CMBS loans are available with up to 10-year fixed rate terms without recourse and typically at longer amortizations. This translates into lower monthly payments and increased cashflow, not to mention enhanced peace of mind. Banks rarely offer 10-year money and will usually demand some level of recourse. Lock into long-term interest rate savings now so you don’t saddle your children with the burden of refinancing in five years in a higher rate environment.
Cash Out Now Tax Free and Diversify
Tapping into your built-up equity and taking cash out when you refinance can produce similar benefits as selling your hotel, yet also lets you retain the asset for your heirs. You can monetize the value you’ve created in the property, then leverage those funds to fuel new investments. CMBS shops don’t restrict how much you can take as cash out. We’ve helped clients free up millions. If your family isn’t ready to step in and take command, you can still step away from the day-to-day operations by hiring a management company. Unlike proceeds from a sale, when structured correctly, the cash you take out is typically tax free. Please consult your tax adviser regarding your particular situation.
As an example, we recently closed a non-recourse loan for a hotel owner in Michigan that included cash out. Now in his 60s, he wanted to spend more time on the beach and golf course, while letting his other family members manage the hotel. Our solution allowed him to cash out over $6 million from his select-service hotel, which was also the primary source of his wealth. He worked with his financial adviser to reinvest the funds in more liquid instruments such as stocks and bonds, generating high returns. Meanwhile, his family formed a management company to take over the management of the hotel. Now our client is enjoying a healthy cash flow from his cash investment, plus a long vacation in Ireland and Scotland playing golf.
You may think you have your succession plan mapped out, but just like the weather here in Chicago, things can always change. A non-recourse loan offers flexibility that will allow you to adjust direction as climate conditions or as your family’s goals fluctuate.
First, all CMBS loans are assumable. If you decide to sell the property before maturity, your buyer can take over or assume your existing loan for a small fee paid by the buyer. This can be a competitive selling point when prevailing rates have increased.
Second, if you need to pay off the loan before maturity because you want to refinance to take advantage of lower rates or sell, CMBS loans can be pre-paid at a penalty.
Third, because CMBS loans are non-recourse, your personal balance sheet stays uncluttered, leaving room for you to take on bank or other recourse debt or SBA debt when investment opportunities arise.
Finally, CMBS loans are estate-planning friendly. The property can be held in a trust, and the lack of personal recourse equates to less red-tape when a borrower dies.
Be well-positioned for the future
Ensuring your property and your family are well-positioned for the future is the best retirement gift you can give yourself and your family. Talk to an expert intermediary to compare your options, and structure financing today that will benefit you and your successors both now and later. ■
Rushi Shah is CEO at Conlon Capital, a commercial mortgage banking firm formed by a merger with Aries Capital, which specializes in CMBS and other non-recourse lending solutions. Over the past 26 years, the Conlon and Aries teams have collectively funded over $8B for hotel, multifamily and other commercial properties. Shah held previous positions at Northern Trust and is a member of AAHOA’s Founding & Allied Member Committee. Shah holds an MBA from The University of Chicago’s Booth School of Business.