Any long-married couple will likely tell you there’s no such thing as the perfect partner. We’re all flawed humans, which means any system we build – whether it’s a relationship or a financing structure – comes with its own challenges.
Hotel development, construction and adaptive reuse/conversion projects are no different. Neither are the lenders who step in to fund them.
Still, some partners are better than others. The best ones tend to see us clearly. They recognize what we bring to the table, acknowledge our weaknesses and support our goals. Most importantly, despite our flaws, they choose to invest in us anyway.
In this sense, private lenders may just be the ideal match for hotel investors looking to carry out an adaptive reuse or conversion.
“For projects where the returns can be higher than ground-up builds, private capital often provides the structure and risk tolerance needed to bring these unique developments to life,” said Ebbie Khan Nakhjavani, founder and CEO of EKN Development and EKN Engineering. “A strong lending partner understands that reuse is not just renovation – it’s reinvention.”
Willing to Convert
Today’s higher cost environment and stringent traditional lending standards have made adaptive reuse or conversion to hotel a sound alternative development strategy for some investors. The problem is, not all lending partners see the light. Many private credit providers do, however, which has turned them into a source of support and partnership on these endeavors.
“Private credit is an especially well-suited financing source for conversion and adaptive re-use projects due to the greater underwriting flexibility that such lenders can provide,” said Jon Gitman, partner at BridgeInvest.
More specifically, Gitman noted that regulated institutions often need to score or grade each loan based upon defined risk metrics that are produced by internal departments or regulators.
“The challenge is these metrics are often defined by asset classes, and an adaptive reuse project may pose a challenge for more regimented lenders to define which asset class they should be scoring,” he continued.
Kevin Davis, Americas CEO for JLL's Hotels & Hospitality Group, added that this problem can be compounded if the lender isn’t as experienced with adaptive reuse or hotel conversions. On the other hand, many private credit providers have the knowledge and expertise to get these projects done for two reasons. One, they’ve filled the lending gap on these types of projects ever since traditional lenders pulled back following the Global Financial Crisis. Two, some private credit providers own assets like this themselves.
“Private credit providers are continuing to attract more capital into their space, so we expect that they will be very active in hospitality,” Davis said. “Private credit likes the hotel space because it provides an inflation hedge and typically offers a yield premium relative to other asset classes.”
And many hotel developers are just as fond of private credit. In fact, some credit (no pun intended) these lenders as the reason their conversion projects were able to cross the finish line in the first place.
“We worked on the financing of a high-quality hotel in New Orleans that was successfully converted from an office building into a hotel,” Davis continued. “It was financed by a private credit provider. The availability of private credit is what enabled the deal to get done.”
It’s also what enabled Hotel Marcel (part of the Tapestry Collection by Hilton) to become the first net-zero hotel and Passive House-certified hotel in the U.S. when it opened in New Haven, Conn., in 2022. Originally constructed between 1968 and 1970 as the Armstrong Rubber Company headquarters, the building was revitalized by architect and developer Bruce Redman Becker of Becker + Becker.
The firm utilized more than $7 million of C-PACE to finance the adaptive reuse project, which included a large-scale solar array. The property can now generate its own electricity for lighting, heating, cooling and hot water for its common areas, restaurant, laundry, meeting rooms, and 165 guest rooms and suites.
C-PACE financing was also used for envelope measures, such as roofing, windows, insulation and lighting. The end result is that Hotel Marcel will use 80 percent less energy than a typical hotel in the United States, according to Nuveen Green Capital, which provided this funding.
To read the rest of this article, visit our sister site Hospitality Investor.