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In our previous blog, we discussed what experienced commercial real estate (CRE) lenders like AVANA look for in a hotel construction project when extending credit. In addition to other essential project details, the qualities or attributes of the entrepreneur are one of the most important factors that our credit team considers. In this blog, we discuss the qualities of an entrepreneur we consider when granting hotel construction loans.
7 Desirable Qualities of a CRE Entrepreneur that AVANA Considers When Extending Loans
1. Creditworthiness
Our credit team determines the entrepreneur’s creditworthiness based on information collected from diverse sources.
Firstly, our team gets a 360-degree view of the entrepreneur’s credit background based on their credit score. We prioritize borrowers with a higher credit score that depicts a sound financial standing and good payment behavior.
Secondly, our team gathers real-time information about the entrepreneur’s financial reputation by collecting information from other industry participants like banks and non-bank institutes.
2. Experience and Expertise
Our loan officers assess the entrepreneur’s experience and expertise by meeting the entrepreneur and interacting with them regularly. During the interaction, we collect relevant details, both good and bad, by asking a variety of questions. These questions help us identify if the entrepreneur matches our Ideal Borrower Profile (IBF).
We also make efforts to understand how the entrepreneur weathered the storm in the past in a sector where variables change frequently. These details help us to manage risks prudently by understanding their behavior and drivers. In addition, they give us an insight into whether the entrepreneur is ready for the long term by evaluating skills like project management and leadership.
3. Operational Knowhow and Team Strength
Every CRE project is a multi-step process. Entrepreneurs need a variety of skill sets to complete and operate a CRE project successfully. While interacting with the entrepreneurs, our credit team evaluates if they have the requisite knowledge in various areas, and whether they have the right team members, who complement their skill sets.
4. Equity Contribution
Our credit team ensures that the borrowers will hold up to their end of the bargain by considering two important factors – equity contribution and source of equity. We assess the down payment based on the loan-to-value (LTV) ratio to determine what percentage of the project the entrepreneur brings into the CRE deal as equity.
A low LTV ratio is desired, but not always necessary. Additionally, we assess the source of equity to know if the entrepreneur is contributing from their side or raising money from investors. We minimize the chances of loan default by expecting the entrepreneur to invest their personal funds in the hotel construction project.
5. Collateral and Guarantee
A low LTV ratio ensures that the unpaid loan balance can be recovered by liquidating the CRE mortgaged by the entrepreneur. However, CRE lenders like AVANA do not operate in the real estate business sector and liquidation is the last resort.
For this, our credit team evaluates the CRE property using important parameters like purchase price, appraised value, rental rates, leasing activities, and net operating income. However, we look for additional security in the form of collateral or guarantees from the entrepreneur.
We allow the borrower to provide additional guarantees in various forms. They can provide the additional guarantee by pledging bank account balance, marketable securities, and additional properties. At the same time, they also have the option to provide a joint guarantee from an entity with a good credit score and sound financial history.
6. Repayment Plan
An entrepreneur can repay the hotel construction loan in several ways. However, most entrepreneurs repay the loan out of the cash flow produced through operations. Our credit team expects the entrepreneurs to get a clear view of cash flow generation and loan repayment.
Our loan officers evaluate the project in detail to ensure that CRE will produce adequate cash flow to repay the loan. At the same time, we ask specific questions to understand the repayment options suggested by the borrower. This helps us understand if the entrepreneur has thought through the project end-to-end to make it successful.
7. Social Impact creation
As an ESG investor, we are driven by our desire to create a positive social impact by funding projects that stimulate local economies and create and retain jobs. We look for these qualities in the entrepreneurs as well, who we are looking to fund.
Conclusion
When processing hotel construction loan applications, seasoned CRE lenders like AVANA evaluate the project using multiple metrics. At the same time, we assess the borrower’s experience, expertise, and capability based on specific qualities or attributes.
We place high emphasis on meeting the entrepreneurs and their teams in person and engage regularly to detect the desirable qualities as well as potential risk areas. The information helps us determine if the entrepreneur possesses the qualities or attributes required to weather storms successfully.
If you are an entrepreneur, who fits these descriptions and looking to fund your next dream hotel project, contact us today.