Today’s lending environment is exceptionally competitive. Capital is tight, lenders are increasingly risk-averse and the markets are crowded. If you’re looking to push a project forward, numbers alone may not be enough to secure a loan—in many cases, a well-crafted narrative is essential to success.
Narratives can make or break a loan proposal. Ultimately, the decision of whether a loan will be approved is made by people, and you have to be able to sell your vision, define what sets your asset apart, and explain how it will deliver good value on the loan to your audience. This may include a deep dive into the growth dynamics of a particular market, an overview of demand generators, or even a briefing on the management and operations professionals responsible for the property.
Building the narrative of your development project is a holistic process, and it paints a full picture of what success will look like. Perhaps most importantly, narratives can help demonstrate your expertise, from your experience in a particular market to the depth and breadth of your portfolio. A good story is what makes a project look like a good investment.
Crafting Your Story
There are several ways you can build a narrative around your loan proposal, but certain areas are essential to telling a full and cohesive story. Here are some factors to consider when telling yours.
1. Start with a thesis statement.
This may feel a little like “Narrative Building 101,” but you need to understand and articulate your investment thesis, which should be simple and to the point, highlighting the core of your project. For instance, if you plan to acquire an underperforming asset in a strong market, consider this: “The hotel needs updates, but its competition is thriving. We could boost margins and create a reliable business with renovations and a new management team.” Your thesis statement should also include the specific steps your team will take to facilitate these improvements. Finally, and most importantly, clearly explain how capital will be allocated from the proceeds of the loan. Lenders want to know how their money is going to be spent, and how it will increase the value of an asset.
2. Gather data… lots of data.
A thesis statement requires supporting evidence, and having clear data is critical to selling a story. This includes both market data and data related to the asset you’re looking to acquire. As you’re seeking data for your narrative, never forget that the hotel world is small and everyone talks, especially in local markets. Relationships can be a key source of information, including relationships with brands, relationships with industry organizations and even relationships with your competitors. Everyone has data and insights, and if they’re willing to share them, that intimate knowledge of a particular market can help build a more compelling loan narrative.
3. Demonstrate your own expertise.
Lenders aren’t just investing in project, they’re investing in you. Be sure to highlight your own expertise. What is your background in the hotel industry? What is your track record? What does your current portfolio look like? Do you self-manage your assets or have a management partner? Are you experienced in the local market?
This is even more critical if you’re seeking to break into a new market or new type of project. Explain in detail why you’re expanding into this arena and what experts you’ve tapped to ensure your project’s success. Even if the financials are solid, lenders are not looking to take on risky projects and will want assurances that you are the right hotelier to transform or develop an asset.
4. Tailor your messaging.
A loan narrative must be tailored to its audience, and the audience may change depending on the type of loan you’re seeking. The narrative around a new development project will be much different than the narrative around a renovation or a refinancing. Yes, a lot of the same information will be included in both of those loan proposals, but the selling points are different. There isn’t a one-size-fits-all narrative for loan proposals.
5. Make it easy to read.
Your loan narrative must be organized, digestible and in a format that’s easy to read. Lenders are busy and don’t have time to parse through a dozen ancillary documents to judge a loan’s feasibility. Ensure an executive summary highlights why this is a good deal and how it makes financial sense. Then the details are available for anyone who wants them.
Common Mistakes
There are some common mistakes borrowers make when developing a lending narrative. Perhaps the most significant would be to provide insufficient market research. You need to be able to articulate the supply and demand drivers of a market and where you see the potential for growth or value add. This means not only knowing that a market has an 80 percent occupancy rate, but also why that market has an 80 percent occupancy rate.
Another mistake would be excluding the challenges of a particular project. We know that every hospitality project comes with obstacles, and presenting a plan for overcoming these obstacles is critical. Lenders look at everything from a lens of risk, so you should be ready with a risk mitigation plan.
At the core of it, your narrative is meant to best position the asset as possible, regardless of what type of lender you’re approaching. Know your audience, know your asset, know your market, and know yourself.
Lenders aren’t just betting on an asset, they’re betting on you, so be the hero of your narrative.
Ryan Bosch is a principal at Arriba Capital, a Scottsdale, AZ-based real estate investment banking firm that specializes in arranging structured finance.