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The Use of Fixed-rate and Floating-rate Debt for Hotels

Cornell University School of Hotel Administration, jc81{at}cornell.edu

Scott Gibson

College of William & Mary, scott.gibson{at}business.wm.edu

A time-series simulation that compares hotel-industry revenue per available room (RevPAR) with London Interbank Offer Rate (LIBOR) indicates that hotel investors would fare more favorably with floating-rate loans than with the commonly used fixed-rate financing. Using data from 1987 through 2004, the study determined that LIBOR and RevPAR changes are strongly correlated, indicating a relationship of RevPAR and floating interest rates. Moreover, a simulation found that hotels using variable-rate mortgages would have been more likely to cover debt service in good times and bad than would hotels financed with fixed-rate loans. The correlation was strongest for midscale, limited-service properties but also operated for budget and resort deals. The relationship of RevPAR with floating rates suggests a reduction in the costs to borrowers and lenders arising from distressed loans.

Key Words: hotel financing • fixed-rate and floating-rate mortgages • debt-service coverage • RevPAR

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