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A Tough Hospitality Market Means Direct Lending Is More Important Than Ever

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A Tough Hospitality Market Means Direct Lending Is More Important Than Ever
HALL's most recent deal was this dual-flagged Aloft Element hotel in Orlando, Fla.

Even in the best of times, the hospitality market can be difficult. The sector operates on low margins with a clientele that comes and goes. Today, with construction costs spiking and the end of a robust economic cycle approaching, securing funding for the construction of a hotel is particularly challenging, especially since many developers may not qualify for a traditional loan from a bank.

To see their projects to completion, many hospitality developers and hoteliers are partnering with private direct lenders that can provide tailored financial solutions and help underwrite the loans necessary to get projects off the ground. 

“Hospitality developers are finding challenges today in terms of fluctuating economic conditions and labor shortages,” HALL Group Chairman Craig Hall said. “We began as a developer and manager of hotels, and that practice helps inform our lending. We know the roadblocks and how to push through them.”

There are many reasons a hospitality developer may not qualify for a bank loan. The developer may be working in a secondary market that a bank considers untested, or have a project that is too small for a bank to consider. Even developers in established markets may simply need more funding to make their vision a reality. HALL Group’s lending arm, HALL Structured Finance, works with these developers to build tailored financial solutions.

Even if they know they need to pursue nontraditional financing, hospitality developers may have trouble choosing a provider, as the landscape of private direct lending has become increasingly crowded. The number of noninstitutional bank lenders has reportedly tripled since 2015. With many different providers from which to choose, Hall said what differentiates HSF from the competition is its expertise in the hospitality market, its background in construction and its emphasis on relationships. 

Because of its strong background in the field, HSF understands the issues and difficulties facing hospitality developers today. The company originated $300M in 2018 and is on track to originate $400M this year. In 2018, Real Capital Analytics listed HSF as the No. 1 nonbank hotel construction lender in the nation.

A Tough Hospitality Market Means Direct Lending Is More Important Than Ever

HSF is also able to forge funding solutions for developers that may not be able to borrow from traditional banks. Creditworthiness, while certainly a major component of a lending decision, is not the only factor considered by a private direct lender. HSF looks at other criteria such as amount of experience in the field, the given business plan and the amount of money a borrower is willing to contribute before making a decision. 

HSF President Mike Jaynes said his team's success stems from its expanded lending criteria.

“We consider the soft factors and the hard factors of the potential borrower,” Jaynes said. “We want a company with a solid business plan, strong experience and with skin in the game financially. But we also understand that there are some fantastic projects that are more entrepreneurial in nature.”

For deals that may be viewed as less creditworthy by banks, HSF considers factors including the project quality, market fundamentals and the caliber of all associated developers, general contractors and architects. Jaynes said HSF strives to take a more relationship-oriented approach than the simple calculus of traditional lending.

While some of the projects on which HSF prides itself include modern boutique hotels in rising markets, such as the Park James Hotel in Menlo Park, California, the lender also works with major chains. Over the past year, HSF has provided construction financing for Hilton, Marriott, Hyatt and Choice-flagged hotels. 

Jaynes said the tailored solutions that a private direct lender can provide for noninstitutional borrowers are becoming more popular. In the past three years, the lending team has tripled in size to manage increasing demand.

“Ever since the end of the recession and the enactment of the Dodd-Frank regulations put on banks, there has been an opportunity,” Jaynes said. “Many hotel construction projects were struggling to get financed. We saw a niche in the market where we could offer a lending program, and we’ve come a long way.”

Despite the competition, Jaynes said the interpersonal relationships fostered by HSF remain the company’s most significant differentiator. 

“We can and do deliver construction expertise,” he said. “Our lending arm is strong and our relationships robust across the nation.”

This feature was produced in collaboration between Bisnow Branded Content and HALL Structured Finance. Bisnow news staff was not involved in the production of this content.