This is part three of a three-part story. To read part one, visit here. Part two is here.
We asked a variety of financing experts to share what owners and operators need to know about the hotel financing right now as well as their opinions on the best hospitality investments currently, how to make the most of the current economic climate and if lenders are financing PIPS and renovations right now.
PIPs and Renovations
Lenders remain highly receptive to funding property improvement plans and major renovations, Adrienne Andrews, managing director in JLL’s Hotels & Hospitality Group, said. This category of lending continues to receive favorable consideration across the board, from debt funds and banks. Andrews believes the positive attitude toward PIPs and renovations stems from several key factors:
- Fresh capital signals commitment: Lenders interpret an owner's willingness to invest additional equity as a strong vote of confidence in the asset's future performance.
- Risk mitigation through physical improvement: Renovations directly address physical deterioration that could otherwise accelerate and require both more costly interventions later and a loss of business (as mentioned earlier).
- Guests like new or “fresh” assets. As such, updated properties typically outperform their competitive set in both occupancy and ADR, creating more sustainable cash flow.
- Finally, if the property is branded, funding PIPs helps ensure continued franchise affiliation, protecting a key value component of many hotel assets.
Ryan Bosch, principal at Arriba Capital, also believes lenders are financing PIPs but with selectivity and structure. “If the renovation is brand-required or clearly improves the asset’s positioning and performance, many lenders will include it in the financing,” he said. “That said, they’ll typically require detailed budgets [with] clear timelines, and often escrow the funds with progress-based draws.”
Most lenders also expect the borrower to contribute equity toward the renovation, Bosch said. They want to see that the sponsor has skin in the game and the financial capacity to complete the project. Underwriting will focus on whether the planned improvements will translate into measurable uplift in cash flow or value.
“Lenders are especially cautious in markets with limited pricing power or where the renovation scope feels aspirational,” he continued. “But when the business case is sound, they understand that well-executed CapEx can drive long-term stability and enhance loan performance.”
Appetite for Repositioning or Conversion Deals?
The current market shows a limited and highly selective appetite for repositioning and conversion deals, with a clear distinction between adaptive reuse and flag conversions, Stan Kozlowski, principal at CooperWynn, said.
Adaptive-reuse projects, such as office-to-hotel conversions, face significant headwinds. The primary challenge is economic viability, he said. “With a sufficient inventory of purpose-built hotel assets available for acquisition, the high costs and inherent complexities of converting non-hospitality structures are difficult to underwrite successfully,” he continued. “These conversions often require extensive capital for structural modifications, mechanical system overhauls and compliance with brand standards, making them less attractive compared to acquiring and renovating existing hotel stock.”
Conversely, flag conversions or "re-flagging" strategies remain a viable, albeit disciplined, approach to value creation, Kozlowski agreed, but the investment thesis for a flag change must be compelling and quantifiable. “A successful conversion hinges on demonstrating that a new brand affiliation will unlock superior performance and capture a greater market share,” he continued. “A prime candidate is often an underperforming asset with a low RevPAR index—for instance, a hotel penetrating its competitive set at only 50 percent—where a new, stronger flag and targeted capital improvements could drive significant top-line growth”
But with all of that said, execution is paramount, Kozlowski warned. A thorough understanding of the brand-mandated PIP is non-negotiable. Given the current volatility in construction and FF&E pricing, it is critical for sponsors to secure multiple, firm bids to accurately budget the PIP. This detailed cost analysis is essential for underwriting the deal and ensuring the projected returns justify the capital outlay.
This article was originally published in the July/August edition of Hotel Management magazine. Subscribe here.