A Loan We Declined: Not Sleeping on Motel Due Diligence

Situation

We were recently approached with a request for a loan sounding strikingly similar to our typical investments. A nationally branded motel in Central Utah was offered to secure the loan, piquing our curiosity, and the mortgage broker provided an appraisal showing that our characteristic loan-to-value requirements would be met.

Due Diligence

As part of our formal due diligence process, we reviewed appraisals on similar properties in the area. Through this discovery process, we actually found in our files information relating to the prior sale of this property. When comparing this history to the recent sale price, the appraisal showed a meteoric rise in value.

Decision

Unfortunately, we believe this rise in value was unjustifiable, especially given how similar properties are performing over the same timeframe. In addition, the appraisal given was largely based on pro forma financials not necessarily reflecting the actual performance of the motel. Due to these risk factors, we passed on the loan.