by RUSHI SHAH
Are there economic advantages if my loan amount is over $20 million?
Yes. First of all, whether you are refinancing $5 million or $50 million, the amount of effort the lender has to go through is the same. Because time is money, lenders will prioritize larger deals where their return on time is greater. As a result, larger-sized deals will be in demand by more capital sources, resulting in more and better options for borrowers.
Second, with a larger loan amount, it takes less dollars for the lender to make an absolute profit. As a result, the lender can reach its target return at much narrower spread. For the borrower, this typically means lower rates and more room for your intermediary to negotiate terms.
Third, borrowers with larger loan amounts also tend to be more sophisticated with industry standard financial statements. This streamlines the process for both the borrower and lender and ensures the transaction moves forward without stalling. Deals that go sideways are troublesome for both the borrower and the lender. If the delay extends, third-party reports may go stale and need to be re-ordered at additional cost, or market changes may hurt cash flow and cause the loan terms to be recalibrated.
Finally, larger loan amounts open up creative financing solutions such as ground leases, where instead of financing your assets as fee-simple properties, you split ownership of the land and the hotels on top into leased-fee and leasehold entities, enter into a 99-year lease with the hotels as tenants and refinance the land separately. Because the operating business carries higher risk, when divided the land can be financed at a higher loan-to-value, better rates and terms, and often with tax benefits (consult your tax advisor). Larger loan amounts may also attract foreign capital, giving borrowers additional choices.
Does it matter if my loan amount is for a single property or hotel portfolio?
Cross-collateralizing multiple hotels and financing as a portfolio is a smart way to get to a larger loan amount. You will reap many of the same benefits as above, plus enjoy better pricing on third-party reports and legal costs than if you had financed each property in a separate transaction. At times, this tactic can also help borrowers finance the portfolio’s weaker quality assets, because they are crossed with stronger properties. ■
Rushi Shah is principal and CEO of the commercial mortgage and real estate investment banking firm and AAHOA Club Blue Founding Member, Aries Conlon Capital. As a leader in hospitality financing, Shah specializes in structuring and placing high-leverage, non-recourse bridge and permanent debt with cash out for full- and limited-service hotels nationwide. Since joining the firm’s predecessor Aries Capital in 2015, Shah has structured and closed hundreds of millions in financing for all property types. Shah has held previous positions at Northern Trust and has an MBA from The University of Chicago’s Booth School of Business.