Hospitality Bridge Loan

OPPORTUNITY

The pandemic stymied many investors’ financing plans, including those of a Southwest hotel owner/ operator who found himself with a rapidly approaching loan maturity in an increasingly restricted market. Having acquired the Clarendon Hotel & Spa in January 2019, the borrower was in the midst of an overhaul when its original loan approached expiration.

The sponsor is an experienced regional hospitality developer/investor that’s been successfully rehabilitating hospitality properties and outperforming competitors using its proprietary management company, Pro Hospitality Group. PHG, which focuses on hotel brokerage, investment and advisory services, has successfully capitalized and operated nine other properties in the region.

The asset is a four-story, 105-room full-service hospitality facility located in a major Southwest city. The 47,600-square-foot Class B property was built in 1972 and renovated multiple times, most recently in 2020. It is a licensed “green-friendly” property and offers such amenities as a fitness center, rooftop deck, restaurant, outdoor swimming pool, hydro spa, sundries shop, 6,000 square feet of meeting spaces and electric vehicle charging stations.

SOLUTION

Red Oak Capital Holdings provided $16.25 million in non-recourse financing, structured as a 12-month bridge loan with four 6-month renewal options. The borrower is using the funds, which carry a fixed rate of 10.00%, to refinance the existing mortgage and complete property upgrades.

Valued at $21.1 million at the time Red Oak provided the loan, the deal reflects an “As-Is” LTV of 77%. The sponsor, which bought the asset in 2019, plans to spend $800,000 out-of-pocket to renovate the guest rooms and update the rooftop deck before refinancing Red Oak’s bridge loan with permanent financing from a local or regional bank or credit union.

After completion of the interior and exterior renovations, the property’s stabilized value is estimated to be in excess of $25 million, representing an LTSV of 64%. The potential annual NOI is expected to increase by 35%, and the property’s stabilized value of represents an approximate 20% return on investment.

CONSIDERATIONS

The sponsor has a solid, comprehensive strategy for the property, involving well-planned revenue generation, marketing and cost-control measures in addition to the physical upgrades. The sponsor plans to implement a thorough inventory of the property’s storage and maintenance areas, analyze and adjust department expenses and create economies of scale by employing national, preferred vendors to secure competitive pricing.

The sponsor has also filed waivers in ordinance with state law to make the Clarendon Hotel & Spa a “green friendly” property. This means the use of cannabis at the hotel is legal, though no cannabis products will be sold or distributed by the property. The rooftop private club will have a cannabis use theme to create additional market demand.

The property is well located with excellent local and regional access, within walking distance of two rail stations and a five-mile drive to an international airport. The borrower intends to increase occupancy by minimum of 500 room nights per year by pursuing marketing agreements with the local civic and convention center, growing its market reach by targeting the broader region’s top employers and reviewing all the hotel’s existing contracts to ensure competitive rates and room consumption.