Hotel lender on helping solve the PIP problem

ATLANTA — The “extend and pretend” philosophy for hotels, which used to be limited to lenders extending stressed loans but during the pandemic included brands not requiring timely CapEx changes, has been slowly coming to an end. Lenders are less forgiving and brands are now reinstating PIP requirements and expectations.

You can call it the “PIP Problem” or the “CapEx Cliff”. Whatever you call it, the bill is due for hotel owners nationwide. This problem has moved Atlanta-based Access Point Financial (APF), a direct capital provider for the hospitality industry, to create a new product to help solve the problem.

Last week, the company introduced a new program of short-term loans for PIP renovations. Access Point Financial CEO Michael Lipson said the new program came when the company was examining market opportunities and talking to brands and franchisees about their problems.

“The good news is the economic performance of our hotels is increasing. The bad news, hidden in there, is that the guest satisfaction scores are starting to decline,” Lipson said. “We’re keeping RevPAR and ADR way up here, but customers are expecting more, and we haven’t put the capital in. So, you have a buildup in the industry. Everybody has a different number, but it’s somewhere between $12 and $15 billion worth of CapEx/PIPs that need to get done over the next couple of years.”

Michael Lipson

Lipson has been in the hotel capital market since the 1990s and worked at Capmark, which became Berkadia. About 10 years ago, he retired and became a board member at private equity-backed APF before being asked to become CEO in April 2021.

He said since no one was doing FF&E loans during the pandemic, APF shifted its business model to do more bridge loans and would sometimes build the PIP into that loan. He thinks the timing is right to return to doing more PIP/CapEx loans that are separate from first mortgage loans (because of current interest rates, he said owners will want to keep those in place).

In 2021, Lipson said APF’s business was 90% bridge loans and 10% new construction loans. He thinks going forward with this new program, APF’s business will be about 50% bridge loans, 25% new construction loans and 25% for this new program and the other types of traditional and mezzanine loans.

“My view is, as a pure hospitality lender, we need to be able to go anywhere in the capital stack that a borrower [needs], except the one thing that we don’t do is, we’re not equity, per se, and therefore, we’re not putting shovels into the ground. We’re not competing against our customers,” Lipson said.

Lipson said once the new PIP program is up and running, he expects the company to do over $100 million in loans (representing about 50 deals) annually.

“Depending on the structure of the ownership and things like that… this is the most efficient, lowest-cost way for someone to [finance] the PIP,” Lipson said. “We can also do it in other forms. We can do it with mezzanine debt, or we can do it with preferred equity, but those are more costly.”

He said that historically, the rates we have today reflect what he would call general market conditions over the past 50 years. “But the problem is everybody got used to the free money that was available, and everybody made their projections based on that,” he said.

Lipson said the average PIP loan will be between $2.5 to $3 million. He thinks it will eventually represent about 50% of the company’s deal volume but only about 20% of the dollars because the loans are much smaller than the other types of loans APF offers. 

The typical PIP loan structure will have a 24-month interest-only period while the PIP is happening, followed by a five-year fully self-amortizing period for the hotel owner. 

Customers the program is serving

Matthew Hick, managing director – business development for APF, said so far the program has been bringing in around 70% new customers.

Matthew Hick

Hick said APF’s clients are usually multi-unit owner-operators (or they have a third-party management company that operates the property). They operate legacy brands in the select-service, limited-service and compact full-service properties.

“Our bread and butter, what we like, is the limited-service space,” Lipson said. 

The ages of the properties are all over the map. “They could be right at the beginning of that [seven-year renovation] cycle. It’s just that the brand comes in and gives them a PIP and says, ‘These are things you need to do to keep your brand… and we look at that, along with our budget, and create a loan based on the cost to complete."

The changes hotels are making usually start with the guest rooms. Bathroom remodels (taking out tubs and putting in showers) are also common, as are updating common spaces in the lobby and hallways, adding new gym and pool equipment, and upgrading the hotel’s technology.

Hick doesn’t anticipate the program changing if interest rates come down over the coming year. “It will lower the price of the debt, of course, but I think it’s needed either way. It’s just a critical part of keeping the hotels up-to-date, modern and desirable.”