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The New ABCs of Hotel Financing

The New ABCs of Hotel Financing

The fundamentals of hotel investing have never been better, and opportunities abound for getting deals done. The current funding landscape isn’t as crazy as the Wild West days of 2007, but a rebounding economy and rosy RevPAR optimism, coupled with new financing schools of thought and plenty of competition, mean opportunities are out there for buying, selling, and refinancing properties. This quick primer from hotel financing insiders tells you what’s really working now.

A is for Alternative Markets
While typically construction has been limited to sexier, primary markets, there’s still a middle ground to be found. “There’s lots of capital in all levels of the capital stack,” says Michael Sonnabend, managing member with PMZ Realty Capital. “So there’s a lot of competition, and for well-thought-out
projects, people are chasing deals and pushing the rates.”

PMZ is unique in that it’s focusing efforts on mid-markets. “We just did an $18 million renovation deal for a full-service hotel in Fresno, Calif., which will operate under no flag during its 12 months of renovation, then it will be converted to a DoubleTree by Hilton,” he says. “We issued a vanilla loan to pay off all debts, then did a 10-year loan for all subsequent phases.”

The deal demonstrated the lender’s willingness to partner on a property with no franchise affiliation. When finished, it will fill a void in a rejuvenated, desirable location. Plus, such a deal demonstrates to the industry that PMZ is a strong, willing player as it expands its foothold on the West Coast. And PMZ is looking to do more deals like this. “People remember when there was no financing available, so they’re jumping at a 4.8 deal for 10 years,” Sonnabend says.

B is for Banks and Other Institutional Lenders
Sponsors with a proven track record, big brands, and primary market development projects always have been the most palatable to lenders. But in a very cyclical industry, with the needle pointing up, now is a good time to be a borrower because capital is available, as long as you have a good plan and good backing. “Lenders have short memories,” says Daniel Marre, partner with PerkinsCole. “In an economic upturn, hotels are the darlings of the investment world.”

Still, Marre stresses that deals are contingent on the value of the sponsor, who’s ultimately on the hook. For smaller hotels and projects in secondary markets, consider partnering up with a third-party management company that’s able to put money behind a deal and demonstrate market knowledge and management efficiencies that lenders look for when sizing up borrowers.

“For any deal, knowing we’re in business with a sponsor who has a firm grasp of the market goes a long way,” says Scott Andrews, managing director of GE Capital, Franchise Finance. “We will only work with proven developers. Third-party construction management that understands the supply chain and development costs is a good system for checks and balances.”

C is for CMBS
“CMBS [commercial mortgage-backed securities] is the big, surprising story in hotel funding,” says Jan deRoos, HVS professor of finance and real estate at Cornell University School of Hotel Administration. “It was practically extinct a couple years ago, but CMBS lenders are back.” The commercial real estate services company CBRE believes that 2014 will see CMBS issuance reach $125 billion, up from $86 billion in 2013. These loans are a good bet for project developers with a track record. “They close quickly, and you can secure larger loans that are reasonably priced,” deRoos says. “Most borrowers will trade a larger loan to lock in a better interest rate.”

CMBS loans are typically five- to 10-year loans at around 70 percent LTV with a rate of 4.9 to 5.2. They’re non-recourse, meaning there’s no personal guarantee. The asset is the collateral, but there’s little flexibility. You’re stuck with the deal, and those structures are most likely to include strict terms and benchmarks, which, if not met, can strangle the cash flow. While the hotel business remains strong, asset equity remains up, CMBS loan delinquency remains down, and the Fed continues its promise to hold interest rates in check, this remains a viable option.

D is for Dual Branding
Likewise, dual branding is a mechanism that’s gaining steam and attractive to lenders. By placing two brands in one building, you’re maximizing efficiency in a number of ways: increasing the number of rooms on the land parcel; sharing a common lobby, public areas, and housekeeping staff; and employing one general manager and one salesperson. “All these serve to capitalize on labor and construction costs,” says Andrews, whose company is looking to step up lending with the right partners.

GE Capital recently granted a $31.6 million construction takeout loan for NewcrestImage, a Texas-based management and construction company, to fund a Marriott Courtyard and TownePlace Suites property near the Dallas/Fort Worth International Airport. It’s the first dual-branded hotel in the area, targeting select-service and extended-stay customers. The property is a prime example of the type of experienced, tried-and-true strength of brand that a big player like GE Capital is comfortable making deals with.
“We’re doing deals where the fundamentals are very strong,” he says. “Building new properties is cheaper than redoing an existing property. There’s going to be a surge on new construction in markets where it’s warranted.”

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