Hotel Finance News

Financing Your Next Deal

Hotel Construction and Investments continue to  show signs of increased activity. Since the middle of last year lenders have been experiencing an increase in loan applications. Investors feel the time is right to get back into the market. But if you haven’t financed a hotel within the last couple of years, don’t assume your past experiences will guide you through the process. Today’s hotel lender market is vastly different than it was a few years ago.

 

10-20 percent down payments are still out there, but you have to know where to look and be prepared to provide required documentation. Some lenders are starting to look for more skin in the game. SBA lenders are requiring 20 percent plus down. Acquisitions that are in some form of distress and borrowers seeking funding for turnaround properties should be prepared to invest 30-35 percent equity in the transaction. Fundamentals of the market, i.e. occupancy, location, RevPAR, as well as an increased percentage of equity will most likely become the norm in the future, even from strong borrowers.

 

National lenders are seeing sophisticated owners and developers seeking funding for their hospitality projects outside of their usual sources as many local and regional banks have ceased originating hospitality loans.

 

In 2009, local and regional banks originated approximately 65 percent of all hotel loans. That number has now dropped to 37 percent. Conduit lending for commercial mortgage-backed securities (CMBS) for hotels, which for the most part were nonexistent for the past two years, are now beginning to start up. Insurance companies are also financing hotels again basically because they perceive the bottom of this recession has passed.

 

Presently, government agencies are originating a very small fraction of hotel loans. The government is providing some guarantee for investors buying pools of first liens in front of 504s. As that market develops, and if it becomes a healthy market to sell those loans, then lenders will certainly get back into the 504 market. There are some costs to investors to get that government guarantee and those costs will have an impact on the prices they’re willing to pay for those loans.

 

Government guarantees will be crucial for the 504 program; however, it will be interesting to see if costs to investors will trickle back to the borrower in the form of higher rates.

 

One of the most dramatic changes of the last few years is the significant decline in the number of lenders originating hotel loans. Some lenders have chosen not to do so, others were deemed by Federal Bank regulators to be too heavily exposed to that property type, and still other lenders are simply out of business or were taken over by the FDIC, or forced to be sold to another bank by the FDIC. Reduction in the number of lenders making new hotel loans means those who are still active in hotel financing are being presented with many more loans than they can take through underwriting and close. This puts lenders in the unique position to cherry pick only the loans with the strongest borrowers, or hotels with strong debt service coverage ratios and those loans where all parties including borrower, seller and brokers are totally co-operative.

 

The underwriting process has become more thorough with an expectation to have your paperwork complete and in order. Would-be borrowers or sellers need a responsive, cooperative attitude. They may get frustrated with all of the lender’s requirements for well written, organized and detailed documentation, but this is the new reality in hotel financing. Key information parties seeking hotel funding should have in hand includes: who is in the partnership group, a clear understanding of the group’s hotel experience – good hotel experience is big plus in today’s market, personal financial statements and tax returns for each of the group’s partners, financial statements and tax returns for other businesses in which the partners have ownership. Overall financial strength and experience are very important to lenders today.

 

Lenders and advisors are working harder today than ever before to make a deal work and close on new loans for hotels.

 

In short, things have changed dramatically. There are far fewer lenders with much stricter underwriting documentation requirements. Capital markets are operating under closer government scrutiny and tighter regulations. There are fewer loan programs available and often requiring more cash down. With fewer lenders and fewer loan programs there are fewer dollars available for hotel financing. To achieve success in this new reality of hotel financing, borrowers should work with only very experienced hotel funding professionals – whether a hotel mortgage broker or a direct lender.

 

 

CAPEX is Set to Exceed Recent Record

Hotel CAPEX is Up for '13

 

The Epicurean, a new 137 room hotel in Tampa by Marriott



The U.S. hotel industry is expected to spend $5.6 billion on capital expenditures this year, exceeding the most recent record of $5.5 billion set in 2008.



The information comes from research by Bjorn Hanson, the divisional dean of the Preston Robert Tisch Center for Hospitality, Tourism and Sports Management at New York University.  Hanson estimates that one-fifth of hotels will receive improvements this year, up from 15 percent in a typical year.

Investors and management companies that waived spending to offset lower profits in a weak economy are now looking at projections showing a much healthier outlook. Occupancy this year is expected to be at its highest level since 2007, while industry profits will be a record $46 billion.  

The MGM Grand in Las Vegas just spent $160 million and 11 months to completely redo 4,200 rooms and suites. The renovation added sustainable features such as LED lights, more efficient thermostats, solar shades, upgraded faucets and showers, and 100 percent biodegradable bath amenities. That staggering cost does not include the many other elements of the resort’s “Grand Renovation,” including the addition of a five-story nightclub, a new restaurant by celebrity chef Michael Mina, major casino upgrades, a new comedy club, and much more.

In a recent survey, 57 percent of travelers said they often make eco-friendly travel decisions. To meet this growing demand, hotels, airlines and rental car companies are working to implement strategies that take the environment into consideration, according to a report in HotelManagement.com.

Two of the world’s urban grand hotels, London’s Savoy and Paris’ Ritz, both have undertaken renovations so dramatic they require closing completely for two to three years.

Closer to home, the Ritz-Carlton Laguna Niguel on the Pacific coast in Los Angeles is marking its 30th year with all new pale blue and white guestrooms and more. The hotel’s location was the source of inspiration for the new design.

Hotel Pipeline

The ten largest hotel brands are on the move: with more than 10,000 new hotel rooms Hilton has the strongest growth, which is even higher as the growth of the industry leader Holiday Inn/Holiday Inn Express with just 7,700 new hotel rooms. This data has been revealed by a current analysis of TOPHOTELPROJECTS (http://www.tophotelprojects.com), the worldwide leading provider of global b2b hotel data.

Holiday Inn/Holiday Inn Express by InterContinental Hotels Group (IHG) remains at the first place of the ten largest hotel brands in the world with a large distance. Follower Best Western grows as quick as Holiday Inn - 4,700 hotel rooms arise internationally but with currently 311,000 existing hotel rooms Best Western is clearly behind the first place.

Hilton, the large and strong brand by the same named US hotel company (which will be brought back to the stock exchange in 2014) is going to pass the brand Comfort Inns & Suites by Choice Hotel and it will reduce the distance to Marriott. Hilton Worldwide is the second largest hotel group so far and therefore is ahead of Marriott International and just a bit behind IHG. A second hotel brand by Hilton which is growing also very strong is Hampton Inn by Hilton.

Place - Hotel Brand - Hotel Group - new hotel rooms at hotel construction projects - number of existing hotel rooms/hotels 
1 - Holiday Inn/Holiday Inn Express - IHG - +7,719 rooms/23 - 424,612/3,392
2 - Best Western - Best Western - +4,775/30 - 311,611/4,024
3 - Marriott - Marriott Int. - +7,050/53 - 204,917/558
4 - Comfort Inns & Suites - Choice Hotels Int. - +196/1 - 194,262/2,509
5 - Hilton - Hilton Worldwide - +10,098/60 - 191,199/551
6 - Hampton Inn by Hilton - Hilton Worldwide - +3,901/29 - 184,765/1,880
7 - Ibis/Ibis Style/Ibis Budget - Accor - +1,978/18 - 182,496/1,667
8 - Home Inns - Home Inns - 0/0 - 164,325/1,438
9 - Sheraton - Starwood Hotels - +5,574/25 - 14,784/427
10 - Days Inn of America - Wyndham Hotel Group - 0/0 - 147,808/1,826
(Source: tophotelprojects.com/MKG Hospitality)

 

If you have a hotel construction project that needs funding then contact me - info@targetsearchgroup.com or 954.439.0612

Top 4 Hotel Financing Obstacles

Do You Have Upcoming Hotel Financing Needs?

Hospitality Net recently posted this blog by Brian Holstein:

Do you have upcoming hotel financing needs? Whether you are in the market for a simple refinance or acquisition financing, a discounted-payoff (DPO) financing or a PIP-induced recapitalization, the same rules apply.

The hotel loan market has been on a good run for the last twelve months with competition among lenders heating to a point not seen since prior to the financial crisis. Lenders are beginning to focus increasingly on areas outside of pricing and leverage in order to preserve loan profitability and keep mortgage leverage below the aesthetically pleasing 70% loan-to-value level.

Simply Put, What This Means For Hotel Loan Borrowers Is That Lenders Are Willing To Listen To Your Story, Now More Than Ever, To Win And Close Your Business.

The following list identifies the top 4 hotel financing obstacles and advice on how to approach them:

1. NOI UNDERWRITING ADJUSTMENTS Unfortunately, the borrower's NOI doesn't aways look like a lender's NOI. Lenders implement a series of underwriting adjustments to determine an "underwritten" NOI. Below are the most common adjustments.

• Occupancy Adjustment– Lenders are reluctant to underwrite occupancy levels above 75%. There are certain markets, particularly those with high barriers-to-entry (New York City), where this rule may not apply or carry a higher threshold. The reason for the threshold is because hotels operating at or above 75% occupancy are typically in markets that have latent demand which may lead to future new supply and pressure on market-wide occupancy.      

It is in an owner's best interest to push ADR in lieu of occupancy prior to a financing. Lenders will not adjust ADR upward to offset a downward occupancy adjustment, so be prepared to do that yourself. Lenders will correspondingly drop variable expenses associated with the lower underwritten occupancy to help offset the downward adjustment.

• FM&M (Franchise, Marketing and Management) Adjustment– Some lenders will underwrite a minimum FM&M expense as a percentage of revenue. For full-service hotels, the minimum is approximately 12.0% and for limited/select-service product, the minimum is approximately 14.5%. Included in the FM&M calculation is the management fee which most lenders will underwrite at a minimum of 3.0%. The FM&M adjustment typically comes into play on owner-operated and un-flagged hotels. A case can be made to waive the adjustment if the historical FM&M expense has been consistent over the years, the hotel is performing near the top of its competitive set and there is no new supply anticipated in the market.
• FF&E (Furniture, Fixtures & Equipment) Adjustment – The standard FF&E adjustment made by lenders today is 4.0% of revenue. Lower adjustments can be made for new or recently renovated hotels. There is a difference between underwritten FF&E and the amount of actual FF&E reserve that will be collected by the lender. It is often easier to negotiate a lower actual FF&E collection than it is to negotiate down the underwritten FF&E for the purposes of loan sizing and pricing. Presenting and explaining a detailed schedule of recent capital improvements is important ammunition to effectively present your case for lower reserves.

2.   RECESSIONARY BATTLE SCARS It has become commonplace for borrowers to have at least one, or multiple, instances of default, workout, foreclosure or bankruptcy as a result of the most recent recession. Prior to the recession, most lenders would avoid such borrowers. Nowadays, if lenders took that same stance, there wouldn't be a whole lot of qualified borrowers.

The foremost question that arises when underwriting the above situation is whether or not the sponsor "played nice" in such times of distress. It is our job to help craft an explanation in a manner that is easily digestible and viewed favorably in the eyes of a lender. Almost every financing we have worked on post-financial crisis included one or more of these stories. We have been successful, without exception, at telling that story and getting credit approval.

3.   LOAN TERM FRANCHISE EXPIRATIONS With an exception for recently constructed hotels, it is often difficult to execute franchise agreements with term in excess of ten years. This poses a problem when seeking five or ten-year permanent financing. Lenders are reluctant to take on the risk that their collateral will be down-flagged or become un-flagged during the term of the loan or at the time of maturity.

A cash flow sweep structure can solve this problem. The sweep is triggered by a non-renewal of the franchise agreement prior to the franchise expiration. The sweep is a temporary mechanism, with all swept cash returned to the borrower once the franchise agreement is renewed and there are sufficient funds available to pay for an associated PIP.

4.   PREPAYMENT PENALTIES Prepayment penalties typically come in the form of yield maintenance or defeasance. Prepayment penalties make it more difficult to take advantage of cap rate declines, as the penalties become more costly as interest rates decline. Below are the most effective ways to mitigate prepayment penalties:

• Loan Assumption – A loan assumption option allows the borrower to sell the hotel encumbered by its existing debt. Although slightly lower leverage and a higher than market loan interest rate may detract from a hotel's value, it is less costly than paying a prepayment penalty to sell a hotel unencumbered. This is almost always true, as yield maintenance and defeasance penalties are discounted at the risk-free rate (U.S. Treasury Rates), whereas a loan interest rate includes additional spread above treasury rates.
• In a rising interest rate environment, a loan assumption will add value to an encumbered sale by allowing a new buyer to take advantage of a lower than market interest rate for the remainder of the existing loan term.
• Additional Debt– Lenders are beginning to allow for the ability to add additional debt post-closing, usually in the form of mezzanine financing. In an encumbered sale scenario, as discussed above, this allows a new buyer to assume the senior financing and "right-size" the loan by adding additional debt at closing. This minimizes or eliminates the discount to market value a seller would otherwise have to accept, particularly in a declining interest rate environment.
• Lengthening the "Open Period"– Most non-recourse hotel loans include a 90-day period at the end of the loan term with which loans can prepaid without penalty. Lenders have the ability to price in longer open periods, with the cost varying amongst lenders. A borrower can think of this structure as having a loan with a shorter term and built-in, prepaid extension options