We recently had a conference call with our non-recourse construction lender who laid out a nifty concept to perform a “rough and dirty” loan sizing for hotel construction loans. ValueXpress will be converting these instructions into a simple model that can be found on our website.
As a refresher, typical non-recourse hotel deal terms are $10 million and up, 75% loan-to-cost, three-year term with options to extend. Rates are reset monthly and are in the Libor plus 6.50% area (6.65% today). Payments are interest only. Properties need to be located in primary markets and constructed by experienced hoteliers.
The sizing begins with a monthly STAR report for the competitive set of hotels that are anticipated to compete with the subject hotel within its market. It is extremely important that the competitive set does not contain any “clunkers” that drag down the average ADR/Occupancy/RevPar for the set. Take the STAR report RevPar for the most recent 12 months, multiply it by 365 and then multiply by the number of proposed rooms. This will indicate the estimated pro forma revenue for the to-be-built hotel.
Our construction partner assumes a 65% expense ratio for limited and select-service hotels (in other words, a Net Cash Flow of 35% of room revenue). Multiply the room revenue above by 35% to obtain the pro forma Net Cash Flow available for debt service. Divide the result by a Debt Yield of 12%, and presto, the result is the rough and dirty loan amount (use the lower of 75% of project costs or this result please).
By example, we recently obtained a $12-million non-recourse construction loan for a limited-service hotel at San Francisco Airport. The proposed hotel is 128 rooms and total project costs are $16 million. The trailing 12-months competitive set Revpar is $100.00. 128 rooms x $100 RevPar x 365 days x 35% = $1,635,200 in pro forma Net Cash Flow. Dividing the Net Cash Flow by 12% = $13,626,667, which is in excess of 75% of project costs ($12 million). Primary market, experienced sponsor, loan > $10 million = LOAN APPROVED!