Competition among hotel franchises is fierce. Franchisors are continually updating the interior and exterior designs for new hotels that become part of their franchise. This updating is often referred to as the latest “prototype” or “brand standard.” Properties that were franchised 10-15 years ago look outdated compared with newer properties. Owners who seek to renew their license agreements are required to upgrade the interior and exterior of their properties to look like the latest “prototype” to remain in the franchise. The upgrades are known as “Property Improvement Plans,” or PIPs.
Take a look here to see how an older Hampton Inn, for example, is converted to the new brand standard.
While the transformation looks very cool, it is very expensive for hotel owners to complete the conversion. Yet leaving the franchise for another is not usually an option for hotel owners as other franchises are typically already taken in the market and any change to a lower-rated franchise could severely reduce the revenue generated by the hotel.
The cost to upgrade a 10- to 15-year-old Hampton Inn or Holiday Inn Express can easily exceed $1 million and can reach as much as $2 million. Many hoteliers have not set aside this large sum of money to complete the required PIP for a license renewal and risk losing the franchise to a competitor.
What is an owner to do? A cash-out CMBS conduit loan!
Here’s how it works: Let’s say the property is a Hampton Inn and has a $1.5-million PIP requirement to obtain a 15-year license renewal. The property is currently worth $8 million as a Hampton Inn and has a $4-million existing first mortgage loan on the property. We will provide a new $5.6-million CMBS conduit loan (70% of $8 million). We will pay off the existing $4-million first mortgage loan and place $1.5 million is escrow to be drawn for the PIP. This way the owner gets a brand new 15-year license with no cash out of pocket!