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AND INVESTMENT GROUP
CREATIVE FINANCIAL SOLUTIONS FOR YOUR
UNIQUE COMMERCIAL REAL ESTATE TRANSACTIONS
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10421 South Jordan Gateway, Suite 600 • South Jordan, Utah 84095 • Real Estate Investment Bankers
investors to identify these undervalued assets and to
then work with a mortgage broker in finding a lender
willing to finance the required value-add upgrades.
There are some rules to follow, however:
■ ■ Replacement cost: The price of the hotel
should be well below replacement value. Building
a 200-room hotel would cost a minimum of $40
million. A value-add property of similar size that
needs renovation might cost under $20 million, or
50 percent of replacement value.
■ ■ Renovation costs: Typically, a sizable renovation
will be required to bring the property to a competitive position. This is the most important part of the
value-add proposition. Buying the asset well below
replacement cost and adding a renovation component can make your acquisition competitive with
properties that cost twice as much.
■ ■ Scope: The amount invested must meet the
need. Overspending does not guarantee greater
returns. Having expertise to help price the improvements is critical. The good news is that if your loan is
on a “value-add” property, your downside should be
well below replacement cost.
Hotels in need of renovation are great candidates for
value appreciation. Brands do not want to lose their
franchise fees, but they also do not want hotels that
are in poor condition in their portfolios. To ensure this,
they issue PIPs, short for property improvement plans.
These PIPs tell buyers they need to spend capital on
specific areas of the property. Those targeted areas
often include infrastructure upgrades; heating, venti-
lating and air conditioning improvements; and other
The costs associated with these PIPs chase away
many buyers, but a potential buyer also must consider
that the property is typically being sold at a significant
discount before the PIP is factored into the equation.
It is critical on these transactions that the bank find
expertise to assess the costs associated with the PIP,
with the goal of helping the buyer to correctly price
the necessary upgrades.
Loans on hotel real estate have many advantages, but
a buyer must still exercise caution. Lending on a full-cost asset can be a good investment because a new
property, built or bought at full-replacement value,
can certainly grow in value based on where you are in
the real estate cycle and the property location. With
proper equity in the deal, these types of transactions
can make sense.
With that said, arranging financing for lower-cost,
value-add hotel properties can be a less-risky path
for borrowers than financing full-cost assets. Pursuing the value-add path in a hotel acquisition can
offer a competitive advantage as well. After the PIP
has been executed, a value-add hotel property can
then compete with new full-priced hotels at a much
lower cost basis. ■■
by Jay Litt
View these articles and more at
“Don’t Disturb Underwriting,”
“A Hotel Feasibility Check,”
“Not Just Another Piece of Real Estate,”
“Hotels March to Their Own Beat,”