Hotel PIPs: Funding a Property Improvement Plan with a CMBS Loan
If you own a branded hotel or hotel franchise, you may be interested in participating in your franchise’s property improvement plan (PIP). Property improvement plans are typically required in order to bring a hotel in line with the franchise’s latest design standards, and in some cases, are mandatory, especially if a franchisee wants to expand their hotel or purchase a new franchise location.
CMBS Loans and Hotel PIPs
If you own a branded hotel or hotel franchise, you may be interested in participating in your franchise’s property improvement plan (PIP). Property improvement plans are typically required in order to bring a hotel in line with the franchise’s latest design standards, and in some cases, are mandatory, especially if a franchisee wants to expand their hotel or purchase a new franchise location. However, PIPs can be incredibly expensive— which is why many hotel owners turn to CMBS cash-out financing in order to fund them.
How Much Does a Property Improvement Plan Cost?
PIP costs can vary greatly with different brands, hotel sizes, and property locations. One of the most popular hotel PIPs, Holiday Inn Express’s Formula Blue, usually costs between $10,000 and $25,000 per room. Since the average Holiday Inn Express location has around 75 rooms, that adds up to between $750,000 and $1.875 million in total costs. Hampton Inn’s Forever Young initiative is another popular PIP, which experts estimate will cost between $15,000 and $40,000 per room.
Is it Worth it to Take Out a CMBS Loan for a Hotel PIP?
Getting a CMBS cash-out refinance to initiate a hotel PIP is a major decision, and shouldn’t be taken lightly. If your hotel is more recent, and you plan to hold onto it for a long time, getting CMBS financing for a property improvement plan could be a great way to increase the value and profitability of your property for years to come. In comparison, if your hotel is much older, a PIP could be prohibitively expensive to execute— and, if you’re not planning to hold onto the property for at least several years, it may not be worth your time and effort.
Related Questions
What is a Property Improvement Plan (PIP) and why is it important for hotel owners?
A Property Improvement Plan (PIP) is a plan that hotel owners must follow in order to bring their hotel in line with the franchise’s latest design standards. It is important for hotel owners because it can help increase the value and profitability of their property for years to come. PIPs can be expensive, which is why many hotel owners turn to CMBS cash-out financing in order to fund them. Source
What are the benefits of using a CMBS loan to fund a PIP?
CMBS loans can be an ideal choice for financing a property improvement plan (PIP). CMBS loans are generally asset-based, so underwriters don’t delve too deeply into borrower financials, which can be highly beneficial for borrowers who may not have the greatest credit. In addition, CMBS loans are fully assumable, so if a borrower wants to sell their property, they can transfer the loan to the new buyer. Most importantly, however, CMBS offers leverages up to 75%, with rates, on average, as low as 4.30% for many borrowers. Conduit loans are also typically fixed-rate, so a borrower won’t have to worry about rates fluctuating during the life of their loan.
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What are the risks associated with using a CMBS loan to finance a PIP?
The risks associated with using a CMBS loan to finance a PIP include:
- Strict enforcement of prepayment penalties
- Higher closing costs
- Not serviced by initial CMBS lender
- Dishonest tranche ratings can have serious negative effects for borrowers and investors
It is important to consider these risks before taking out a CMBS loan for a PIP.
Source 1 Source 2What are the requirements for obtaining a CMBS loan for a PIP?
In order to obtain a CMBS loan for a PIP, lenders typically look at two major metrics: DSCR and LTV. Additionally, lenders will look at debt yield, which is determined by taking the net operating income of a property and dividing it by the total loan amount. This helps determine how long it would take a lender to recoup their losses if they had to foreclose on the property. Borrowers are typically required to have a net worth of at least 25% of the entire loan amount, and a liquidity of at least 5% of the loan amount.
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What are the best practices for managing a CMBS loan for a PIP?
The best practices for managing a CMBS loan for a PIP include:
- Ensuring that the loan is structured in a way that meets the needs of the borrower and the lender.
- Making sure that the loan is serviced properly, and that the borrower is aware of their obligations to the lender.
- Working with the master servicer to ensure that the loan is being managed properly.
- Working with the special servicer if the loan goes into default.
- Making sure that the PIP is completed in a timely manner and that the property is brought up to the franchise's standards.
For more information, please see this article and this article.