Re-positioning a Limited Service Hotel for Success in a Tertiary Market

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  2. Re-positioning a Limited Service Hotel for Success in a Tertiary Market
Re-positioning a Limited Service Hotel for Success in a Tertiary Market

The Problem: Borrower is a single location hotel owner and owns a 58-room limited service hotel property in the Austin-Round Rock, TX Metro market. The Borrower is comprised of 5 partners, all of whom are savvy business owners who, in addition to owning the hotel property, have full time jobs and are extremely successful.

The Borrower needs to secure funds to finance the property improvement plan required by the Franchisor. Despite the Borrower’s business acumen, certain challenges need to be overcome:

  1. Borrower is absentee and resides outside of the State
  2. Loan Request is Projection Based: While the hotel performed well in the previous 18 months, the amount of capital required to complete the Property Improvement Plan is in excess of $1,000,000; the hotel’s previous operating performance does not support the additional debt.
  3. Existing Mortgage has an adjustable Interest Rate in a Rising Interest Rate Environment: The Borrower’s existing mortgage, which was originally used to finance the purchase of the property in 2014, has a quarterly adjustable interest rate. Throughout 2017, the Fed raised interest rates several times, increasing the Borrower’s cost of borrowing by nearly 20%.
  4. The hotel is located in 50 miles east of Austin, TX with a small population and limited market drivers.

 

The Madison One Solution:

  1. Work closely with the Borrower to evaluate comprehensive business plan and projections; play up the core strengths of the Borrower in providing a significant secondary repayment source.
  2. Finance the required $1,000,000 to complete the property improvement plan and satisfy the Franchisor; Madison One focused on market feasibility and the ancillary strength of the Borrower to support the 80% LTV commercial financing request.
  3. Lock Borrower into a fixed interest rate loan at less than its existing interest rate by refinancing their existing debt, thereby eliminating the risk of rising interest rates and providing an element of certainty in the Borrower’s projected operating performance.
  4. Work closely with Operator, Manager and Franchisor to identify the key market drivers and barriers to entry that will enable the business to sustain and grow its revenue. By providing the capital to implement the Property Improvement Plan, we help set a clear path for long term growth under the franchise model.

The Results:

  1. Borrower gained in excess of 20% tangible monthly benefit through the refinance of the mortgage; lower interest rate and a complete 29-year term and amortization.
  2. The Property Improvement Plan financed by the commercial loan proceeds resulted in the only franchised hotel property in the Austin-Round Rock, TX Metro market with updated design requirements.
  3. Eliminated the risk of higher interest rates by refinancing the quarterly adjustable interest rate into a fixed interest rate loan product guaranteed by the USDA.
  4. Borrower can seek out new expansion opportunities by freeing up $4,000,000 in available SBA borrowing capabilities.