In an earlier blog post, I discussed my observation in the marketplace that finally we are seeing Sellers and Buyers reaching the same valuations for property. Sellers have adjusted their expectations a little and Buyers realize in many cases that there can be significant upside in buying a property even at market values, especially in the improving economic climate.
Improving Economy
Sure, there’s concern over gas prices affecting travel – however, the American tourist has proved remarkably resilient and reluctant to give up their vacation time! In addition, we continue to see record numbers of international visitors taking advantage of favorable exchange rates. At the same time business travel is recovering and the economy continues to post gains in many sectors leading one to believe that a slow steady climb back to prosperity may be in the cards after all.
Available Funding
The one sticking point that remains is availability of funds. While there is a perception that funding sources have loosened up and we have seen more traditional sources of funding for hotel sales recently, we are still on the leading edge of capital availability. This is why we are seeing far more transactions close under creative structures and seller funding that ever before.
For a Buyer, it is much easier, cost effective and quicker to close on Seller terms rather than going a conventional financing route. There are significant benefits to the Seller as well, especially potential tax advantages and better return on investment.
Creative Structures
What do “creative structures” look like in hotel transactions? Some options available for purchasing a hotel, be it your 1st or 100th, are the following:
A. 10% Down SBA financing
Provided a property cash flows and a buyer can qualify for an SBA loan (especially meeting the necessary SBA experience requirements!) this is the most conventional of the “creative” scenarios. Most Sellers are willing to be 10% flexible on a property at the right price and terms and the SBA approval means a strong buyer will be in place with experience to run the property.
B. Lease/Option
This is a variation on Seller financing which generally allows a Seller more security. A lease will usually contain provisions allowing the Seller to resume control upon default without the headache of a foreclosure. The Buyer will need to be experienced and bring a reasonable down payment to the table. A Seller will generally require financial updates on a regular basis and the property be maintained until the option to purchase is exercised. This can meet 1031 requirements if properly structured. The deed to the property is not transferred.
C. Seller Financing
If a property is owned “free and clear” of a bank loan, a Seller has the option to accept a down payment from the Buyer and offer financing directly to the Buyer. A properly written Seller note has the capability to be re-sold, generally at a discount so a Seller can be “cashed out.” The structure of a sale may entail a trustee monitoring the note, a collection escrow firm, regular financial reporting and many of the same provisions as a more standard mortgage.
D. More Options
There are plenty of Sellers willing to entertain even more unusual structures including:
- Partial interest transfer via sale of partnership percentages
- Joint Ventures for redevelopment or refurbishment
- Management and profit share with option to purchase
As a Buyer, with even 10% down and some flexibility in your expectations, you can purchase a hotel property that will suit your goals and be in and operating before the peak summer season. If financing has been your hesitation, now may be the perfect time to look at the opportunities currently available.
As a Seller, the ability to look at alternatives is a key to selling your property at a strong market cap in the most timely manner. This doesn’t mean creative solutions are the only solution just that keeping options open allows you to reach the greatest number of active buyers.
Contact Joseph Kennedy at joe@crystalip.com to discuss your acquisition or disposition needs.
