Outside the Lending Box

by Richard Price & Bruce Woodry

Buyers of destination resort properties rely on financing from institutional lenders to provide the adequate leverage to get investor returns to an acceptable level. This article will focus on the factors impacting obtaining a loan for acquisition finance, or refinance, of destination resort properties.

The current credit marketplace for destination resort properties are limited to a few knowledgeable players.  Many lenders have recently withdrawn from the market, leaving the remaining lenders with too many transactions, overloaded staff, and the ability to pick and choose the best deals.  Some lenders have reached their internally imposed Ahouse limits@ for geographic regions or for particular property types. AInside the box@ thinking may prohibit other lenders from being aggressive in financing resorts and therefore, depending on the lender, the Aloan value@ of a resort may be less than expected.

In today=s environment, funding a resort is difficult and can take between six and nine months.  Resort operators are competing against other resorts for financing, as well as other mixed-use of properties.  Resort operators are in good company, as mixed used developers of all types are having difficulty finding financing.    Therefore, it=s imperative to get lenders to think outside the box to improve the potential for a higher loan value.  Unfortunately, most resort operators have little experience in this area.

The lenders have become less aggressive than during stronger economic periods, and have imposed more stringent underwriting criteria. Because of cyclical operational earnings shortfalls, current property valuations in the resort business are at a historical low point, one of the worst since 1974 and worse than the 88-91 crunch.  Because property valuations are so low, they will not support refinance or a sale in many cases.

Both the purchase price and the loan value are determined by property valuation models that apply appropriate capitalization rates to the net operating income (NOI) of the property.  The NOI is similar to EBDITA, and is calculated as cash flow net of capital expenditures and management fees, and before interest and depreciation.  The lender is interested in Astabilized@ NOI and normally calculates it using the resort=s historical operating results.  This means that a lender, in determining the value of the resort as collateral for his loan, will not give much, if any, credit for projected (pro forma) earnings.  An investor or operator, on the other hand, is especially interested in the earnings potential of the property and will base his valuation on a discounted cash flow (DCF) analysis model.