Capital Expenditure – Also known as CapEx. Money spent by a business to acquire or maintain fixed assets such as land, buildings and equipment.
Capitalization Rate – The capitalization rate (or cap rate) for a hotel is used as a way to compare potential returns on various real estate investments. Different operating metrics can be used, however, net operating income is most frequently cited. To determine a hotel’s cap rate, divide the NOI (or other metric selected) by the hotel’s total value.
Capital Markets – A market in which individuals and institutions trade financial securities. Organizations or institutions in the public and private sectors also often sell securities on the capital markets to raise funds. This type of market is composed of the primary and secondary markets.
The stock and bond markets are parts of the capital markets. For example, when a company conducts an IPO, it’s tapping the investing public for capital and is using capital markets. This also is true when a country’s government issues Treasury bonds in the bond market to fund its spending initiatives.
Cash-on-Cash Return – ratio of annual NOI after debt service to the total cash invested in the hotel; the cash investment includes the equity investment in the hotel plus any additional cash invested in capital improvements by the owner; = (NOI – debt service) ÷ cash investment
Census – The total number of hotels and rooms in STR’s database in a particular segment.
Chain Scales – Chain scale segments are a method by which branded hotels are grouped based on the actual average room rates. Independent hotels, regardless of their average room rates, are included as a separate chain-scale category. The chain-scale segments are:
Upper upscale chains
Upper midscale chains
Class – Luxury, upper upscale, upscale, upper midscale, midscale, economy – Class is an industry categorization which includes chain-affiliated and independent hotels. The class for a chain-affiliated hotel is the same as its chain scale. An independent hotel is assigned a class based on its ADR, relative to that of the chain hotels in its geographic proximity.
Collapsed Submarket Class – This designation is similar to market class with the following exceptions: Luxury and upper upscale are collapsed to form a single class (luxury and upper upscale). Upscale and upper midscale are collapsed to form a single class (upscale and upper midscale). Midscale and economy are collapsed to form a single class (midscale and economy). The submarket classes are:
Luxury and upper upscale
Upscale and upper midscale
Midscale and economy
Collateralized Debt Obligation – An investment-grade security backed by a pool of bonds, loans and other assets. CDOs don’t specialize in one type of debt but are often nonmortgage loans or bonds. Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique because they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as tranches or slices. Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays.
Commercial Loan – A debt-based funding arrangement a business can set up with a financial institution. The proceeds of commercial loans may be used to fund large capital expenditures and/or operations a business may otherwise be unable to afford.
Because of expensive upfront costs and regulation related hurdles, smaller businesses don’t typically have direct access to the debt and equity markets for financing purposes. They must rely on financial institutions to meet their financing needs.
Similar to consumer credit, businesses have a variety of lending products to choose from. A line of credit, term loans and unsecured loans are examples. Small businesses should shop at different institutions to determine which lender offers the best terms for the loan.
Commercial Mortgage-Backed Securities – A type of mortgage-backed security secured by the loan on a commercial property. A CMBS can provide liquidity to real-estate investors and to commercial lenders. As with other types of MBS, the increased use of CMBS can be attributable to the rapid rise in real-estate prices throughout the years. Because they’re not standardized, there are many details associated with CMBS that make them difficult to value. However, when compared to a residential mortgage-backed security (RMBS), a CMBS provides a lower degree of prepayment risk because commercial mortgages are most often set for a fixed term.
Competitive Set – A competitive set consists of a group of hotels by which a property can compare itself to the group’s aggregate performance. There must be a minimum of three hotels in any competitive set and a minimum of four hotels in Europe, excluding the subject hotel. To protect proprietary data, a single hotel or brand cannot exceed 40% of the competitive set for North American hotels and 50% for hotels outside of North America. A single hotel company (i.e. Marriott brands, Choice brands, etc.) may only comprise 60% of the competitive set room supply.
Construction Loan – financing for a development project; typically these loans are short-term, covering the construction timeframe (1 to 3 yrs); after construction is completed, the developer usually pays off the construction loan by refinancing with a Permanent Loan – a standard loan for existing hotels.
Contract Rooms – Contract rooms are occupied at rates stipulated by contracts – such as for airline crews and permanent guests. Room allotments that do not require guaranteed use or payment should not be classified as contract. Rooms sold under such allotments should be classified as transient.
Credit Agreement – A legal contract in which a bank arranges to loan a customer a certain amount of money for a specified amount of time. The credit agreement outlines all the rules and regulations associated with the contract. This includes the interest that must be paid on the loan.
A credit agreement can be a lengthy and detailed document that explains all the terms of the contract. For the most part, all types of loans (ranging from credit cards to mortgages) have some credit agreement, which must be signed and agreed on by the bank or lender and customer. The contract doesn’t come into effect until the document has been signed by both parties.