What is RevPAR and how does it drive financing?
RevPAR = Revenue Per Available Room = ADR (Average Daily Rate) × Occupancy. The single most-watched hotel performance metric. Lenders underwrite a hotel's RevPAR vs its comp set (using STR/STAR reports), the trend over the past 3–5 years, and the projected RevPAR after any planned renovation. Outperforming the comp set on RevPAR is the strongest financing signal a hotel can show.
What is a STAR report?
STR (Smith Travel Research) STAR Report — the industry-standard benchmarking report comparing a specific hotel's performance against a defined competitive set on three metrics: occupancy, ADR, and RevPAR. Lenders require an active STAR subscription on every hotel loan. The "index" — the subject's ratio to the comp set average — is the key underwriting input. Lenders want occupancy index, ADR index, and RevPAR index all tracking at or above 100% (parity with comps).
What is a Property Improvement Plan (PIP)?
A PIP is a franchisor-mandated renovation scope. Major hotel brands (Marriott, Hilton, Hyatt, IHG) issue PIPs at franchise renewal (typically every 7–10 years), at change of ownership, and sometimes at brand-standard updates between renewals. Scope ranges from $500K cosmetic refreshes (paint, soft goods, FF&E) to $10M+ full repositioning (new lobbies, ballroom redesign, room mod). PIPs are non-negotiable — failing to complete on schedule terminates the franchise. Bridge financing or capital reserve is required to fund.
Why are hotel rates higher than apartment rates?
Three reasons: (1) hotel revenue is daily-rate, not lease-rate — much more volatile; (2) hotels have material operating leverage — fixed costs (mortgage, utilities, payroll baseline) absorb a large share of revenue, so a 10% RevPAR drop can move NOI 25%+; (3) hotels have larger capital-expenditure cycles (FF&E refresh every 5–7 years, full PIP every 7–10) that reduce free cash flow vs apartment buildings. Lender pricing reflects these risks — typically 100–250 bps wider than apartment for comparable LTV/term.
Can I do owner-operator hotel financing with SBA?
Yes — SBA 504 is the dominant product for owner-operator branded select-service or limited-service hotels under $20M total project cost. 90% LTV (10% borrower equity), 50% senior bank loan + 40% SBA 25-year fixed-rate debenture + 10% equity. For multi-property hotelier scaling, SBA limits matter (per-borrower aggregate caps), but for a first or second hotel, SBA 504 almost always beats conventional commercial pricing.
What is FF&E and why does the lender require a reserve?
FF&E = Furniture, Fixtures, and Equipment — the soft and hard assets inside a hotel that wear out: bedding, carpet, drapes, room TVs, lobby furniture, kitchen equipment. Lenders require a monthly FF&E reserve deposit (typically 4–5% of revenue) so the cash is available when items reach end-of-life. The reserve funds get spent down on pre-approved replacements without dipping into operating cash flow. Lenders won't close a hotel loan without an FF&E reserve mechanism.
How does brand affiliation affect financing?
A long-term franchise agreement with a major flag (Marriott, Hilton, Hyatt, IHG, Accor) is the strongest financing signal a hotel can show — it provides distribution (loyalty programs deliver 30–60% of room nights), pricing power (brand standards support ADR), and exit liquidity (other operators want flagged properties). Independent hotels finance, but at wider rates and tighter LTV. Soft-brand affiliation (Autograph, Tribute, Curio) is a middle ground — independent operations with brand distribution.
What is the difference between a franchise and a management agreement?
Franchise: the owner pays brand fees and follows brand standards, but operates the hotel themselves (or hires a third-party management company). Common for limited-service. Management agreement: the brand operates the hotel directly under a long-term contract, charging management and incentive fees against operating performance. Common for full-service luxury hotels (Ritz-Carlton, Four Seasons). Lenders treat franchise files as owner-operated and weight sponsor experience heavily; management-agreement files weight the brand operator's track record more.