The Best Time to Build a Lender Relationship is Before You Need One

How transparency, strong operations, and early communication created long-term value for Newport Hospitality Group and Live Oak Bank

By Andrew Carey

After 30 years as a hotel owner and operator, I have learned one certainty about working with lenders: They hate surprises. That may sound simple, but it gets to the heart of what makes an owner, hotel management company, and lender relationship work.

Too often, financing is viewed as transactional. An owner needs capital, a lender evaluates the deal, the loan closes, and everyone goes back to their respective corners until refinancing, a covenant issue, or another significant event brings them together again.

The better approach is to view the lender as part of the hotel’s larger capital and operating team. When owners, operators, and lenders share information, understand the business plan, and communicate before problems become crises, they are better positioned to make decisions that protect both near-term cash flow and long-term asset value.

For hotel owners seeking financing, the quality of the management company can have a meaningful impact on how a lender views the opportunity. Newport deeply appreciates its lender relationships. Live Oak Bank is one of our many valued partners that places considerable weight on the third-party operator’s experience and capabilities.

Blair Bunting, Associate Director, Hospitality, at Live Oak, recently sat down with me to discuss the nuances of the owner/operator-lender relationship.

“The ownership group sets the vision, but the management company turns that vision into a guest experience and an operating result every day,” she said. “An owner’s decision to engage an experienced third-party management company strengthens the credibility of a financing request. It signals to us that the owner has put a professional operating structure in place to execute the business plan.

“As an experienced operator, Newport brings a proven track record, market knowledge, brand relationships, commercial expertise, and the infrastructure to respond when conditions change,” she added. “That added layer of experience and accountability helps reduce perceived operating risk. A strong operator adds confidence to a loan request.”

What lenders want to see, she said, is alignment and accountability.

Performance Is More Than a DSCR

While Debt Service Coverage Ratio (DSCR) and debt yield naturally matter to lenders, hotel performance cannot be understood through one or two numbers.

“Live Oak looks closely at the RevPAR index and the story behind the metrics,” Blair said. “We want to know if the hotel is capturing its fair share of demand; if increases in room rates are making their way to the bottom line; and if those gains are being consumed by higher payroll, insurance, taxes, and other operating expenses.”

That distinction matters to operators too. At Newport, we do not begin the annual budgeting process by backing into a DSCR covenant. We start with market dynamics and operating economics and determine how to generate the maximum sustainable cash flow from the property.

Our priorities are straightforward: we create great guest experiences and maintain a healthy building. When we do both, we create lasting value for everyone in the capital stack.

If market conditions change, however, we may need to adjust. Payroll and inventory are generally among the first areas where an operator can identify savings. Deferring maintenance may eventually enter the conversation, but that decision deserves much greater caution.

Cutting maintenance can improve cash flow today while creating a larger financial problem tomorrow.

Difficult Quarters Require More Communication, Not Less

Hotels will underperform from time to time. A soft quarter by itself is not necessarily what concerns a lender.

“Sustained RevPAR-index declines, repeated budget misses, deteriorating guest scores, deferred maintenance, and inconsistent reporting warrant greater scrutiny,” Blair told me. “Therefore, we watch for properties where revenue is increasing, but little of that growth reaches the bottom line.

“What matters enormously is how the operations team responds. Newport does this exceptionally well,” she added. “Your team brings us into the conversation and communicates updates at every step, in both good quarters and difficult ones.”

That is precisely how we at Newport believe the relationship should work.

An owner or operator does not need to have every answer before communicating a problem. But lenders should understand what has changed, how it may affect the hotel’s financial performance, and what management is doing in response. Bad news rarely improves with age.

One place where owner, operator, brand, and lender alignment becomes especially important is a Property Improvement Plan. PIPs are disruptive, but they are also critical to keeping hotels relevant. The real danger is often not the PIP itself, but poor planning and execution.

We frequently see renovations performed piecemeal over an extended period. That can prolong guest disruption while diluting the impact of the completed renovation. If possible, we prefer to carefully plan the work around our hotels’ slowest operating periods and complete renovations efficiently in one coordinated process.

From the lender’s perspective, the implications extend beyond construction costs.

“A PIP can affect room availability, near-term cash flow, asset value, and even the amount of equity required to complete a transaction,” Blair said. “That is why the owner, operator, brand, and lender should align on scope, timing, and funding before the work becomes urgent.”

Refinancing Starts Earlier Than You Think

That same philosophy applies to refinancing. Owners approaching loan maturity should not wait until the final months to determine what the property’s current cash flow will support.

Live Oak recommends beginning that conversation 12 to 18 months before maturity, particularly when borrowing costs have changed. Owners and operators should take an objective look at RevPAR index, operating margins, guest scores, upcoming PIP requirements, and deferred maintenance. That runway provides time to correct weaknesses and demonstrate sustained improvement.

The manager also plays an important supporting role. While the owner ultimately tells the recapitalization story, the operator must provide credible numbers and an operating plan that reinforces it.

“Protect your options before you need them; building relationships is key,” Blair warned.

A best-in-class relationship between the owner, operator, and lender is built on transparency, shared information, and trust. It recognizes that hotel ownership is not a single transaction, but a continuum through changing markets, renovations, refinancing cycles, and inevitable periods of stronger and weaker performance.

Any management team can slash a budget to make a spreadsheet look better in the short term. Creating sustained value is much harder. It requires an owner willing to reinvest, an operator who can execute the business plan, and a lender who understands both the asset and the strategy behind it.

When all three work from the same information and toward the same long-term goal, the relationship becomes more than servicing debt. It becomes a partnership in creating value.

---

ABOUT THE AUTHOR

Andrew Carey is the Chief Executive Officer at Newport Hospitality Group, overseeing the firm’s new growth opportunities through equity ventures and new acquisitions, as well as the company’s general operations. Earning his MBA from the Haas School of Business at the University of California, Berkeley, Andrew started his career 20 years ago by structuring and investing limited partnerships in a variety of real estate environments. Shortly thereafter, he joined Paine Webber, where he helped to source and invest $200 million in real estate investments across the United States. Andrew now strives to ensure that every property in Newport Hospitality Group’s portfolio receives the best possible hotel management expertise.