November 30, 2016
By Sundip Patel
Founder and CEO, AVANA Capital
Guest Contributor, C-Suite Wednesday
C-Suite Wednesday — The 5 KPIs You Must Check Before Financing a Hotel
A recovery in the lodging industry has made hotels attractive for investment. Here are the five Key Performance Indicators (KPI) you need to know when evaluating a hotel transaction:
Bet on the team. Look for an owner or management team that is knowledgeable, experienced and passionate about the property and its customers.
Consider these issues:
- Visibility – Is the hotel visible from the highway?
- Proximity – How close is it to draws like an airport, businesses or tourist attractions?
- Competition – Does demand exceed supply?
- Area Demand – Is the population growing, stagnant or shrinking?
3) Operational Statistics
Compare property data with other hotels in the franchise using the following rules of thumb:
- Net Operating Income (NOI) — Most properties operate at 28% to 40% NOI.
- Cap Rate – Most properties fall in the 8% to 12% cap range, depending on their brand and age.
- Gross Room Revenue (GRR) – Hospitality assets usually trade between 3x to 5x of GRR.
A strong brand greatly increases a hotel’s potential success in the following ways:
- Marketing — Major franchisors like Hilton and Marriott invest millions in advertising every year.
- Guests — Brand dictates whether the hotel will attract budget, business, leisure or other guests. Determine if the targeted sector will be lucrative for this market.
- Amenities – Franchisors specify what amenities the hotel must have, which can affect construction and operating costs.
- Training – Franchisors provide guidance, helping to ensure franchisee success.
- Occupancy – Franchisors drive occupancy through reservations systems, online marketing and loyalty programs.
5) Balance Sheet
Consider the strength of the borrower’s balance sheet:
- Post-closing Liquidity – Hotel owners should have at least 5% loan balance in cash after closing to cover unexpected expenses or cash flow issues.
- Global Cash Flow – The borrower should be able to cover his/her living expenses until the property is profitable.
- Personal Financial Management – How the borrower manages his own finances reveals how he’s likely to manage his business’s.
Tally the Score
Now rate each of the five KPIs on a scale of 1 to 5, with 5 being the strongest. Add together. Lend on the asset only if the total score is above 20.
Sundip Patel is the founder and CEO of AVANA Capital, a nationwide commercial real estate lender based in Glendale, Arizona. AVANA offers hotel financing through conventional and SBA 504 lending programs for acquisition, refinance and construction. AVANA also provides interim and bridge loans. Since its founding in 2002, the company has funded more than $850 million in loans. For more information, visit www.avanacapital.com.