by Rushi Shah
In today’s world, you would be hard-pressed to name an industry that hasn’t been affected or even disrupted by technology. As hotel owners, you experience the advancements every day in how you attract customers, manage your business, and communicate with your staff. The capital markets are no exception. A commercial loan transaction can be a clunky process, and there are many companies turning to technology to streamline it. While technical advancements will certainly increase efficiency and improve the overall transaction experience, hotel financing will still continue to need strategically placed human touch to get borrowers to the closing table. Let’s explore why.
The Art of the Deal
Hotel financing is complicated and no two deals are exactly alike. A skilled intermediary will draw on his or her expertise, lender relationships, and creativity to tell the story, and sculpt the optimal capital stack and loan terms that meets both the lender’s criteria and borrower’s needs. He or she will know how to guide the transaction, adjusting the course as needed. This is the art of the deal.
The science of technology can empower the art by making the financing process faster but cannot replace it. This is because so many of the decision check-points in the loan transaction process rely on expert judgements and are not rule based. Human touch is critical for negotiating terms, influencing decision-makers to make exceptions to a policy, driving valuations, architecting deal structure to create a win-win for borrowers and lenders, and turning deal weaknesses into opportunities for a capital source. For example, we closed a heavily structured deal with a sponsor who had a previous credit blemish and had only recently acquired the assets. We were able to demonstrate to the lender that the asset had significant upside and that the sponsors had already created value. We used ground lease bifurcation to secure a full cash-out strategy and achieve effective higher leverage and lower overall interest rates to the sponsor on assets that needed significant CapEx. This was a story that would have been difficult, if not impossible, to tell through software. Bottom line: Our human intervention resulted in a successful $77 million closing for the client.
Empowering the Art Through Science
For a typical CMBS transaction, an intermediary does a tremendous amount of research to assess market dynamics and devise an option of value and size a loan for optimal execution. All of that hard work can unravel, however, if undisclosed items are uncovered after the lender starts its due diligence process. Some surprises will merely stall a transaction. Many will trigger the lender to adjust the terms (not always in the borrower’s favor). Others will outright kill it. Leveraging technology early on to analyze market and comp data and spot accounting irregularities can speed up this arduous research phase. When issues are brought to light earlier, there is a better chance that they can be addressed and even solved, instead of derailing the transaction later.
Where Technology Offers the Most Impact
Some of the more common technology being used in our industry today includes application programming interface (API), artificial intelligence (AI) and machine learning. APIs allow one software to talk to other data sources seamlessly without human intervention. Capital market intermediaries use API to get better data faster, so they can make knowledge-based decisions. Better decision-making upfront, translates into less risk of changes to the loan terms later, known as re-trading. Through AI technology, intermediaries can more quickly assess comparables, determine an opinion of value, and calculate the optimal levels of debt the asset can support. Wall Street analysts rely on machine learning technology to evaluate financial statements and convert the data into cash flow underwriting models. This strategic use of technology empowers the players, streamlines the process, and prevents unnecessary human error. It’s no wonder many institutions are putting significant venture and institutional capital behind these technologies to try to disintermediate the capital markets.
A great example of how technology is improving the hotel financing transaction is using API to enable access to the information available in a hotel STR report. The ability to easily download the competitive set from STR, accurately analyze the information, quickly identify positive and negative trends, immediately highlight any irregularities, and then use that robust information to create a data-backed story that addresses any pain points is powerful.
It’s humanly impossible to uncover everything upfront using the current methodology. With the power of technology, however, much of the information that historically has taken 60 to 90 days to uncover can now be detected in 60 to 90 seconds. For example, many jurisdictions in the country have automated court records. Thanks to technology, other more readily available data sets include new construction activity, airport landings and departure schedules, local jobless claims, crime rates, delinquent real estate taxes, and negative environmental issues. Automation makes it easier to frontload the data into the deal process, which brings greater certainty of execution at the end.
Use of technology within the hotel financing world is growing every day, but there is still a greater concentration of usage among higher-volume intermediaries and capital sources that enjoy economies of scale. Over time, strategic technology advancements will become the standard, as borrowers and capital sources demand the efficiencies, likely cost savings, and minimized risk of re-trade it delivers.
Bringing Both Sides Together
The ideal intersection of humans and tech occurs when savvy humans leverage the rich data generated by integrated software built with AI technology to structure terms and then overlay those decisions with their relationships and negotiations. Even as advancements are made, the human touch, expert judgement, and strong relationships between capital providers and seekers all still have more of an impact on the success of the final outcome, then the integration of technology.
Rushi Shah is principal and CEO of the commercial mortgage and real estate investment banking firm and AAHOA Club Blue Member Mag Mile 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.